PAGENO="0001" `f y j C ENERGY AND ENVIRONMENTAL OBJECTIVES `~`~ ~ r~ ~ ~ HEARINGS BEFORE THE SUBCOMMITTEE ON ENVIRONMENT OF THE COMMITTEE ON COMMERCE UNITED STATES SENATE NINETY-THIRD CONGRESS SECOND SESSION ON ENERGY AND ENVIRONMENTAL OBJECTIVES MAY 6 AND JULY 18, 1974 Part 2 Serial No. 93.-68 Printed for the use of the Committee on Commerce - JV~4'~ ~ ~!7 ~ ~ /7) / L 73/2~~-~ U.S. GOVERNMENT PRINTING OFFICE 42-367 WASHINGTON : 1974 PAGENO="0002" COMMITTEE ON COMMERCE WARREN G. MAGNUSON, Washington, Chairman JOHN 0. PASTORE, Rhode Island NORRIS COTTON, New Hampshire VANCE HARTKE, Indiana JAMES B. PEARSON, Kansas PHILIP A. HART, Michigan ROBERT P. GRIFFIN, Michigan HOWARD W. CANNON, Nevada HOWARD H. BAKER, JR., Tennessee RUSSELL B. LONG, Louisiana MARLOW W. COOK, Kentucky FRANK E. MOSS, Utah TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina J. GLENN BEALL, Ja., Maryland DANIEL K. INOUYE, Hawaii JOHN V. TUNNEY, California ADLAI E. STEVENSON III, Illinois FREDERICK J. LORDAN, Staff Director MICHAEL PERTSCHUK, Chief Counsel S. LYNN SUICLIFFE, General Counsel LEONARD BICKwIT, Jr., Staff Counsel ARTHUR PANKOPF, Jr., Minority Counsel and Staff Director THOMAS L. ADAMS, Jr., Minority Staff Counsel SUBCOMMITTEE ON ENVIRONMENT PHILIP A. HART, Michigan, Chairman FRANK E. MOSS, Utah, Vice Chairman JOHN 0. PASTORE, Rhode Island MARLOW W. COOK, Kentucky RUSSELL B. LONG, Louisiana HOWARD H. BAKER, Ja., Tennessee JOHN V. TUNNEY, California JAMES B. PEARSON, Kansas ADLAI E. STEVENSON III, Illinois (II) PAGENO="0003" CONTENTS CHRONOLOGICAL LIST OF WITNESSES MAY 6, 1974 Page Fant, Lester G., III, attorney, Cohen & TJretz, Washington, D.C 79 Shulman, Harvey J., attorney, Media Access Project, Washington, D.C.; accompanied by Robert and Carole Kunstadt 39 Exhibit A 68 Exhibit B 68 Exhibit C 73 Exhibit D 74 JULY 18, 1974 Black, Samuel, attorney, Tax Analysts & Advocates 136 Letter of August 27, 1974 141 Dowd, Joseph, vice president and general counsel, American Electric Power Service Corp.; accompanied by A. W. D. Gronningsater, tax counseL~_ 108 Exhibit A 122 Loveland, B. F., vice president, marketing-commercial sales, Shell Oil Co 124 Letter of August 19, 1974 129 Miscellaneous articles 131 McKenzie, Harold C., Jr., senior vice president, Georgia Power Co.; accom- panied by Frances Pledger, advertising manager; and N. Underwood, general counsel 147 Prepared statement 151 Exhibit A 158 Exhibit B 158 Exhibit C 199 Schmertz, Herb, vice president, Public Affairs, Mobil Oil Co., accompanied by David A. Lindsay ADDITIONAL ARTICLES, LETTERS, AND STATEMENTS Allport, Peter W., president, Association of National Advertisers, Inc., letter of July 15, 1974 195 Crichton, John, President, American Association of Advertising Agencies, Inc., letter of July 16, 1974 196 Schmidt, Herman J., Mobil Oil Corp., letter of February 22, 1974 159 Sirkin, Natalie, letter of May 9, 1974 195 Smith, Stanford, president, American Newspaper Publishers Association, letter of July 19, 1974 198 (in) PAGENO="0004" PAGENO="0005" ENERGY AND ENVIRONMENTAL OBJECTIVES MONDAY, MAY 6, 1974 U.S. SENATE, COMMIr2EE ON COMMERCE, SUBCOMMITTEE ON THE ENVIRONMENT, Washington, D.C. The subcommittee met at 9 :35 a.rn. in room 5110 of the Dirksen Senate Office Building, Hon. Philip A. Hart (chairman of the sub- committee) presiding. Senator HART. The committee will be in o~der. I think it is generally understood the subcomi'nittee earlier this year began a review or an effort better to understand the relationship between the energy crisis and those efforts which are underway to protect the environment. And today, a continuation of that general study brings us to the question of advertising and its relationship and effect. To help us better understand that, we welcome as our first witness Mr. Harvey Shulman of the Media Access Project of Washington. Mr. Shulman? STATEMENT OF HARVEY J. SHULMAN, ATTORNEY, MEDIA ACCESS PROJECT, WASHINGTON, D.C.; ACCOMPANIED BY ROBERT AND CAROLE KUNSTADT Mr. SHULMAN. Thank you, Senator Hart. I am assisted today by our student intern, Robert Kunstadt. Carole Kunstadt will handle some of the displays we have for the subcommittee. I am an attorney with Media Access Project, a Washington, D.C., public interest law firm specializing in representation of citizen groups and individuals who seek access to the electronic and print media in order to present their views on important controversial issues includ- ing the environment, the energy crisis, equal employment and various consumer-related matters. For some months now Media Access Project has been conducting an in-depth study of corporate advertising which addresses environmental and energy issues. For example, in January 1974, we filed a petition with ti~e FTC on behalf of six Members of Congress requesting that the FTC require substantiation for many of the claims made in corporate image adver- tisements which favorably portray the advertiser's environmental and energy performance and record. Staff member assigned to these hearings: Leonard Bickwit, Jr. (39) PAGENO="0006" 40 We were concerned that the FTC was permitting businesses to win increased profits by making false or misleading image claims. In March 1974 we served as counsel to. and joined with, 16 Members of Congress and several citizen groups in requesting this countrys 6,000 radio and television stations to provide free air time for spot advertisements which would present consumer-oriented solutions to the energy crisis [in contrast with the hundreds of oil and utility com- pany ads now being aired]. We were motivated by fears that on important public issues the broadcast industry was permitting itself unwittingly to be used as a propaganda mouthpiece for the business community. I am here today at your kind invitation to talk about another aspect of the massive propaganda campaign being conducted by a large number of America's giant businesses. In short, our investigation and research has revealed that many oil, utility and other energy-related industries have engaged in mas- sive violations of both the tax laws of the United States and account- ing principles established by the FPC. While the exact amount of money involved cannot be stated at this time, it is clear that we are in the midst of a multimillion dollar scan- dal involving the failure of the Internal Revenue Service and the FPC to enforce laws regarding the proper tax and accounting treatments of enormous sums of money spent for corporate advertising. Every citizen, as a taxpayer and as a ratepayer, is suffering finan- cially and politically from this scandal. As part of our investigation of corporate advertising, media access project began to notice the trend away from soft image advertising toward harder hitting ads which discussed matters of legislative concern. We were particularly interested in determining whether businesses were improperly treating the costs associated with certain political ads as deductible business expenses under section 162 of the Internal Revenue Code; and whether utilities were treating the costs a ssociated with such ads as operating expenses to be passed along in the form of iiicreased rates to consumers. During our investigation we were contacted by staff members from this subcommittee who explained that in preparation fr proposed hearings on "Advertising and the Environmental Movement," they would appreciate any material we had gathered on that subject. V\Te turned over an enormous amount of material to this subcommit- tee, including most of the ads which I will discuss today. Sometime later, when we learned that Senator Hart had written to many corporate advertisers to obtaiii their views on the tax treat- ment of certain of these ads, we reqnested to see the responses. The staff, as I understand it, made these respoiises available to our- selves and others for analysis to the extent that the companies did not reouest nondisclosure. We and others were then invited to present our evaluation in this forum. I would like to lodge with the subcommittee-and I have already done so as part of my written statement-exhibit A, a copy of the letter which Senator Hart sent to 35 selected energy-related companies PAGENO="0007" 41 that conducted advertising campaigns in major newspapers and on the maj or television networks. Among the questions asked were (a) how much the company spent on total advertising in 1973 and (b) how that amount was allocated among product/service advertising, goodwill/institutional advertising and political advertising; the latter being defined as that advertising considered to be, for tax purposes, nondeductible as a business expense under IRS Reg. 1.162-20(c) (4). Additionally, each company was sent one or more of its advertise- ments and was asked to classify the ad or ads into one of these three categories. I would like to submit to this subcommittee copies of those ads, marked as exhibits 1 through 99, as well as a list attached as "exhibit B-Description of Ads Attached to Senator 1-lart's Letter of January 28, 1974 to Various Companies." The amount of aclveitising by the selected energy-related industries is staggering. General Motors, for example. spent $243 million in 1973. Amounts spent by oil companies varied from $8.9 million expended by Phillips Petroleum to $27.1 million spent by Texaco. The total of advertising expenditures for the oil companies to which Senator Hart wrote-Atlantic Richfield, Exxon, Gulf, Mobil, Phillips, Shell, Texaco, and the American Petroleum Institute-is $126.0 million. Since the figures provided by Gulf were held by the subcommittee as confidential, I have estimated Gulf's expenditure at $15 million, somewhat less than the amount spent by the other companies. Of this $126 million the companies contend that 45.5 percent should be classified as product/service advertising, 47.1 percent as institu- tional/goodwill advertising, 6.4 percent as miscellaneous, and 0.7 per- cent as nondeductible political advertising. In absolute figures, the dollar amounts assigned by the oil companies to each category, again estimating for Gulf, are $58.3 million for prod- uct/service advertising, $59.8 million for goodwill-institutional ad- vertising, $7.1 million for miscellaneous advertising, and $.8 million for nondeductible political advertising. It is most significant, and I will further this throughout my testi- mony, that only Mobil Oil Co. considers any of its 1973 advertising to be in the nondeductible political category. Of course, it must be recognized that these dollar totals ($126 million for the industry companies to which Senator Hart wrote) do not in- clude other major oil companies such as Standard of Indiana, Sun Oil, Standard of California, Getty, Ashland, Hess, Cities Service, and others. It may be that the oil industry, when considered as a whole, spends a quarter of a billion dollars on advertising in 1973. The total amount of money spent by utility companies on adver- tising is more difficult to compute. In 1970 the Nation's utilities spent $88.7 million on promotional and institutional advertising. Not in- cluded in that figure are other sales expenses which totaled over $300 million. Neither of these amounts should be expected to have decreased in 1973-in fact, advertising appears to have increased as more utilities PAGENO="0008" 42 are taking to the airwaves, and the pages of our newspapers and magazines. Moreover, there has been an expanded campaign by utility trade groups who do not report their figures to the Federal Power Com- mission, such as the American Gas Association. 1973 advertising totals for the selected 15 utilities and utility-related companies which responded to Senator Hart's letter are $6.0 million on product/service advertising, and $0.7 million on miscellaneous advertising, for a total of $17.6 million. With the exception of Florida Power & Light Co., none of these companies categorized any of their ads as nondeductible or political. A more complete analysis of 1973 utility expenditures can be found by referring to the annual accounting reports filed each year with the FPC. It is an enormous task to aggregate and categorize the forms of the over 200 reporting utilities. Yet to give some idea of the scope of the current utility ad cam- paigns, we have examined the forms for the seven members of the not especially large American Electric Power system. These companies spent $3.6 million on product/service and insti- tutional/good will advertising; stated that only $18,000 was spent on political activities: and they reported no political ads, although many political ads were sponsored by American Electric Power in 1973. It would not be too far afield to suggest that utility advertising expenditures for 1973 exceed $100 million and may, according to esti- mates of an FTC Commissioner, run as high as a third of a billion dollars. There will always be problems in attempting to define the various types of advertising that exist in this Madison Avenue era so that every advertisement can be neatly categorized as being of one type or another. I would like to describe product/service advertising. We would probably all agree that. product/service advertising con- sists of direct claims about the product or service sold by the adver- tiser which are intended to sell that product or service. Product/service advertising which is an ordinary and necessary business expense may be treated as tax deductible under section 162 of the Internal Revenue Code. Similar "advertising designed to promote or retain the use of utility service" and which does not specifically refer to any appliances ~old by a utility advertiser, must be listed as an operating expense under account No. ~13 of the FPC's uniform system of accounts. This accounting system, under which over 90 percent of the Nation's utilities must report their expenses to the FPC, basically classifies expenses as either operating or nonoperating. The FPC usually considers operating expenses as legitimate utility costs to be passed along to purchasers of electricity or natural gas in ratemaking proceedings over which the FPC has jurisdiction; and even where rates are set by a State utility commission, rather than the FPC, the FPC's recognition of an item as an operating expense often serves to similarly Jegitimize the absorption of the costs by the con- sumer-ratepayer affected by State utility commission ratemaking proceedings. PAGENO="0009" 43 Nonoperating expenses may not usually be passed along to pur- chasers in FPC proceedings, and a like result is often achieved, though not required, in State proceedings. Next I discuss institutional/goodwill and political advertising. There is a greater disagreement about the deffnition of institutional/ goodwill advertising and its treatment for tax and FPC accounting purposes. The Publishers Information Bureau and Leading National Adver- tisers, Inc., refer to such advertising as "image advertising." They define "image advertising" as including advertising which is "devoted primarily to selling the corporate personality"; its first ob- jective goes beyond the direct sale of a single product or service. A broader definition was offered in conjunction with a major indus- trial marketing survey in 1967. It defines "image advertising" as "ad- vertising in media, the prime purpose of which is other than a direct influence on the purchase of a product or products, and the motive behind which is the projection of the corporate image-even though such advertising may be `product' in nature." To a large extent1 all nonproduct/service advertising may be con- sidered as "image advertising" in that it obviously seeks to portray the corporate advertiser's practices and policies in a favorable light. ~1Tet for purposes of the internal revenue laws and the FPC's ac- counting procedures, institutional/goodwill advertising is more strictly defined. Under Internal Revenue regulations, for institutional/goodwill ad- vertising to be considered as a deductible business expense, not only must it be "ordinary and necessary," but it must also be intended to "keep the taxpayer's name before the public" and be "related to the patronage the taxpayer might reasonably expect in the future." The Internal Revenue regulations also draw a distinction between two different types of institutional advertisements. I think this is the crux of what we will be getting into in the testimony. The Service says: A deduction will ordinarily be allowed for the cost of advertising which keeps the taxpayer's name before the public in connection with encouraging contribu- tions to such organizations as the Red Cross, the purchase of ITS. Savings Bonds, or participating in similar causes. In like fashion, expenditures for advertising which presents views on economic, financial, social, or other subjects of a gen- eral nature, but which does not involve any of the activities specified in para- graphs (b) or (c) of this section for which a deduction is not allowable, are deductible if they otherwise meet the requirements of the regulations under sec- tion 162. The other ty'pe of institutional advertisement which Senator Hart has chosen to call "political" is treated in paragraphs (b) and (c), as follows: Expenditures for lobbying purposes, for the promotion or defeat of legisla- tion for political campaigns (including the support or opposition to any candidate for public office), or for the carrying on of propaganda (including ad- vertising) relating to any of the foregoing purposes are not deductible from gross income. As an example, the Service gives: The cost of advertising to promote or defeat legislation or to influence the public with respect to the desirability or undesirability of proposed legislation is not deductible as a business expense, even though the legislation may directly affect the taxpayer's business. PAGENO="0010" 44 Expenditures for the promotion or defeat of legislation, in the words of theiRS: Include hut shall not be limited to expenditures for the purpose of attempting to: (1) Influence members of a legislative body directly, or indirectly by urging or encouraging the public to contact such members for the purpose of proposing, supporting, or opposing legislation; or (2) influence the public to approve or reject a measure in a referendum, initiative vote on a constitutional amendment, or similar procedure. Certain "political expenses" which are "in direct connection with appearances before, submission of statements to, or sending coinmuni- cations to. the committes. or individual members" of legislatures "with respect to legislation of direct interest to the taxpayer" were specifi- cally made deductible by Congress `in 1962 in section 162(e) of the Internal Revenue Code; but Congress expressly stated that the 1962 law should not be construed as allowing the deduction of any amount paid "in connection with any attempt to influence the general public or segments thereof, with respect to legislative matters, elections, or referendums." The 1962 law was intended only to eradicate the anomaly by which taxpayers could deduct for direct communications with the Execu- tive, administrative agencies, and courts, but was prohibited from similarly deducting for direct communications with legislatures. Again, it was not intended to reverse longstanding Internal Reve- nue policies, continuously applied since 1918 when the Service's rule stated `that: Sums of money expended for lobbying purposes, the promotion or defeat of legislation, the exploitation of propaganda, including advertising other than trade advertising, and contributions for campaign expenses, are not deductible from gross income. The 1918 regulation underwent various semantic changes. but its substantive provisions remained the same. In short, the 1962 law was not a. license to corporate advertisers to propagandize t.o `the public on matters of legislative concern, or any other controversial matters, through subsidization from the public coffers. The FPC also treats political advertising in a way distinct from institutional/goodwill aclvcrti sing. For FPC accounting purposes, institutional/goodwill advertising is to be listed as an operating expense in account No. 930, miscellaneous general expenses. Although the FPC has never fully defined what constitutes such advertising, it has recognized its purpose is to foster `and maintain public goodwill rather than for any immediate and direct promotion of sales for electricity or appliances. However, where such advertising is political in nature. it must be listed as a nonoperating expense in subaccount No. 426.4 entitled "Expenditures for Certain Civic, Political and Related Activities." This account includes all expenditures incurred, and I quote: For the purpose of influencing public opinion with respect to the election or appointment of public officials, referenda, legislation or ordinances (either with respect to the possible adoption of new referenda, legislation or ordinances or repeal or modification of existing referenda; legislation or ordinances) approval, modification or revocation of franchises; and perhaps key in our dis- cussion today, including all expenditures "for the purpose of influencing deci- sions of public officials." PAGENO="0011" 45 Expenditures "which are directly related to appearances before regulatory or other governmental bodies in connection with the re- porting utility's existing or proposed operations" are not to be classi- fied in account 426.4. This is similar to the IRS treatment of direct lobbying. As I have previously indicated, categorization of an expense as operating or nonoperating is often controlling in FPC ratemaking proceedings. It need not be followed by the FPC nor by State regula- tory bodies which may permit such costs to be passed along as operat- ing expenses to ratepayers. Whatever the exact contours of FPC subaccount 426.4, it is obvious that it encompasses a broader definition of "political advertising" than that used by the Internal Revenue Service. While the cost of advertising which attempts to influence the deci- sions of public officials in administrative agencies should definitely be classified as a nonoperating expense under FPC rules, that cost might currently be a legitimate business expense under the Internal Revenue regulations to the extent that the advertising does not deal with mat- ters of legislative concern. What I am going to do now is really get into the crux of the factual presentation, Senator, and discuss our analysis of your letter and the responses which you received. As I previously stated, with the exception of Mobil Oil Co., none of the companies to which SenatOr Hart wrote classifies any of its advertising as political-for example, nondeductible under the tax laws. Yet an analysis of the ads enclosed with the Senator's letter re- veals that a vast majority of them are clearly nondeductible and, in the case of utilities, should also be listed in a nonoperating expense account. Although we have examined in detail all of the ads which accorn- pany Senator Hart's inquiry, as well as other ads, it is not feasible to refer to each of over 100 ads in this hearing. Therefore, I will now discuss briefly approximately 36 political ads. And I am submitting with my statement exhibit D, which is a brief written evaluation cor- relating all of the ads which could be~considered political with relevant legislation now pending in Congress. I would also submit to this subcommittee as exhibit E-attached to this statement-a list summarizing the energy or environmental legis- lation now or previously pending in Congress to which the political ads in question relate. For purposes of this presentation only I have divided the ads I will discuss into eight subject matter areas: the Clean Air Act, oil com- pany profits, offshore oil and gas drilling, the Alaska pipeline, natural gas prices, nuclear power, utility rate increases, and general compre- hensive schemes for solving the energy crisis. I will first discuss advertising related to the Clean Air Act. There is no doubt tl~at most oil companies and utilities do not favor the strict control.s imposed by the Clean Air Act. Many of these companies have run extended propaganda campaigns urging amendment to that law. For example, a Phillips Petroleum ad, exhibit 39, which is on the display board; entitled "America's Best Kept Secret: The Cost of Meeting Federal Auto Emission Standards" argues for changing the PAGENO="0012" 46 Clean Air Act and adopting the less stringent California standards for auto emissions. The ad ends, and I quote. "Time is running out. If you agree with us that the California standards provide a more practical approach to the auto emission problems, express your viewpoint to your congres- sional representatives and to the Environmental Protection Agency," end quote. Most recently, an ad run just last week by the American Electric Power System, which I would like to introduce as exhibit 100~ asks, "Are we blind to the real energy crisis?" and argues that, "It is absolutely imperative that the Clean Air Act be amended in regard to sulfur dioxide emission standards applicable to electric utilities." It is difficult to understand how such advertising could be classified as anything but political for tax purposes in light of the many bills in Congress on this matter, including one that passed the House last week. Yet. Phillips has stated that it intends to take a tax deduction for its ad. Significantly, however, Mobil Oil Co. has expressed its intention to treat its Clean Air Act ads, exhibits 30 through 34, as nondeductible. Those are in the record for comparison. I would next like to get into advertising on oil company profits. We are all familiar with legislation intended to establish an excess profits tax or roll back oil prices because of unprecedented percentage rises in oil company profits. The industry has been mounting an overwhelming propaganda blitz against this legislation. For example, exhibit 44, a 1974 Shell Oil ad, entitled "How in All Conscience Can Anyone Call These Excess Profits?" states, "There is much talk of an excess profits tax," and pre- sents arguments that any congressional action "should not be a hastily enacted attack on the independent industry which would impose cor- porate excess profits taxes based on some arbitrarily chosen historical performance." In its response to Senator Hart's letter, however. Shell remarkably considers this ad to be nonpoliticad and therefore deductible. In sharp contrast, Mobil Oil Co. has indicated that it considers its similar excess profits ads, such as exhibit 22, to be political and therefore nondeductible. The next subject area of advertising involves offshore oil and gas drilling. Offshore oil drilling has been a controversial issue for many years now, involving environmental questions raised by accidents such as the Santa Barbara Channel oil spill. There have been numerous attempts in Congress to address this matter, including bills to require certain permits for exuloring or mining oil and gas underneath the TJ.S. waters and a bill calling for a moratorium on drilling in the Santa Barbara Channel. Yet, with the exception of Mobil Oil, which states that it considers such ads addressing this matter to be nondeductible, Mobil Exhibits 19 and 23, all other companies have expressed their intentions to treat similar ads as legitimate business exnenses. For example, and I draw your attention to the display chart, 17 mid-Atlantic utility companies ran a 1973 ad, exhibit 78, entitled, "Energy from the sea. The possibilities are out of sight." The ad urges for rapid development of offshore oil and gas reserves. PAGENO="0013" 47 All of these companies, including Consolidated Edison and Brook- lyn Union Gas of New York, claim the ad to be a deductible business expense. Moreover, the costs for this ad appear to be listed in FPC operating expense accounts rather than in the nonoperating political advertising account, 426.4, with the result that ratepayers may be supporting this political propaganda. The next subject matter of advertising involves the Alaska Pipe- line. I think this subcommittee is probably very familiar with legis- lation that dealt with the Alaska Pipeline. Ever since the Alaska Pipeline was proposed some years ago, it has been a volatile environ- mental issue. It finally took an act of Congress amending the Mineral Leasing Act of 1920, and the National Environmental Policy Act of 1969, to authorize construction of the pipeline. And the Senate passed important parts of the pipeline bill by only one vote. Thus, it seems unbelievable that advertising calling for immediate construction of the pipeline could be classified as anything but political. Nevertheless, several companies which ran pipeline-related ads have already claimed or plan to claim tax deductions for those ads. For example, several 1971 ads run by Esso Oil, now Exxon, exhibits 9, 10, 11, and 12, have been ruled and this is very significant, in a pro- ceeding before the FCC to have presented the argument for construc- tion of the pipeline. That same year, in response to legal arguments that a pipeline right-of-way could not be granted by the Federal Government with- out amending the Mineral Lea.sing Act, a bill to that effect was intro- duced in the Senate. Yet despite the FCC ruling and the legislation in Congress, Exxon, in its response to Senator Hart, labels its 1971 pipeline ads as nonpolitical and hence we presume a business expense deduction was taken for those ads. Similar tax treatment is intended by Atlantic-Richfield for its 1973 Alaska Pipeline ads, exhibits 3- A, B, and C, and 4. For example, Arco asks, "What stands between our Nation's energy shortage and 10 billion barrels of Alaska oil," and poses the issue in exhibit 3-A, "must it be one pipeline-that is through Canada-or the other?" The ad argues: "Construction of the pipeline is being delayed by a fundamental issue now under consideration by Congress. We need the Alaska Pipeline now. Let's get on with it." Are we really expected to believe that these ads which ran in the New York Times, the Washington Post, and the Wall Street Journal, are nonpolitical? And who can know what the outcome of the Senate vote would have been if this propaganda blitz had `been conducted on a smaller scale for fear that the tax laws would be fully enforced? The next area of advertising involves natural gas prices. Again, the Senate Commerce Committee is well aware of legislation which has been pending for some time to deregulate the wellhead natural gas prices which are established by the FPC. The American Gas Association, an industry trade group, has adver- tised heavily in favor of deregulating so that gas prices will be able to rise. Exhibit 76, entitled, "The Energy Shortage: What It Means To You," states that, "The Federal Government and its regulatory agen- cies," must act, "to set prices at a more realistic level so there will be sufficient incentive for producers to risk money in the search for new supplies of gas." PAGENO="0014" 48 Surprisingly, however, to ourselves and I am sure to Senator Steven- son, who has introduced legislation in this area, the American Gas Association does not classify this ad as political. Thus the portion of dues and contributions to the AGA from member companies which is being used to finance this and similar ads is apparently being treated by each member, relying upon the AGA's evaluation, as a deductible business expense. In contrast, Mobil Oil's ads calling for deregulation of natural gas prices, exhibits 35 and 36, were properly classified by Mobil as nondeductible. Another area of advertising which is also extremely controversial involves the use of nuclear power. The potential hazards and risks associated with the production of electrical energy from nuclear power sources has led to calls for a moratorium on the development of nuclear power plants. Most recently, Senator Gravel addressed this issue, inserting into the Congressional Record a list of labor, environmental, farmer, and local governmental groups who have called for a moratorium. Senator Gravel stated: If the moratorium movement could match the millions of dollars which advo- cates of nuclear power spend on public education, there is no doubt in my mind that the American public would rapidly reject nuclear power. Persuasion is not a problem for moratorium advocates. Their problem is un- equal access to the public's mind. In one word, the problem is money. On the other side, since at least early 1972, bills have been pending in Congress which call for a more accelerated rate of development and Atomic Energy Commission approval of nuclear powerplants. Not unexpectedly, a 1flassive amount of advertising in support of rapid develop1nent of nuclear power has been disseminated by utility and oil companies. Yet, with the exception of Mobil Oil, which recognizes the costs of such advertising to be nondeductible, all other companies responding to Senator Hart's letter classify nuclear power ads as nonpolitical and properly deductible. Perhaps the greatest offender in this category is the electric com- panies advertising program, which I will refer to as ECAP, ECAP's ad is present on the display board. In 1973, over 70 investor-owned light and power companies participated in the ECAP program which brought us such ads as exhibit 53 entitled, "Why shouldn't I be con- cerned about nuclear powerplants?" The ad strongly argues that nuclear powerplants are safe to operate, and that disposal of nuclear wastes is stringently regulated. The ad ends by stating: We need your understanding of this fact. And we ask for your cooperation in helping to see that nuclear power plants are developed and built as promptly as possible wherever they are needed. Another favorite ad run a couple years ago by ECAP is exhibit 55 entitled, " `Mom's Apple Pie Is Radioactive; So Is Mom.' That doesn't make her a dangerous woman. Radiation is just naturally everywhere, in the Earth, in your homes, in your food, in your mom." It shows a picture of mom holding an apple pie which she appears ready to serve to us. This is the type of nuclear power campaign to which the public is being exposed. PAGENO="0015" 49 Among the contributors to the ECAP program are the members of the Southern Co. System. Yet reference to the FPC accounting forms filed by some of the System's members-Alabama Power Co., Georgia Power Co., Gulf Power Co., and Mississippi Power Co.- shows that none of these companies listed any political advertising costs. We are left with the conclusion that ratepayers are supporting this nuclear power campaign through increased rates. Moreover, Georgia Power Co.'s response to Senator Hart's letter indicates that the com- pany did no advertising in 1973 which it considers nondeductible; hei~ce, Georgia Power's view also reflects a clear violation of our tax laws. Oil companies have also taken up the fight for nuclear power. For example, Exxon states in exhibit 7, We'd like you to know-Today nuclear power supplies five percent of America's electricity. Tomorrow, it could supply over 50 percent. We need to reach this goal as soon as possible. Exxon argues that "environmental objections, labor shortages, tech- nical problems," et cetera, have delayed the construction of new nuclear powerplants, and that nuclear power is needed quickly to help make America self-sufficient. Yet Exxon claims in its response to Senator Hart's inquiry that it does no political advertising and can legitimately cledtict this ad as a business expense. The next area involved utility rate increases. In a 1973 landmark decision, the Federal Communications Commission said what con- sumers and environmentalists had long been contending: that utility ads which argue for rate increases present only one side of a contro- versial issue of public importance. In that case, two Georgia television stations were ordered to present antirate increase views. One of the ads which gave rise to that controversy is exhibit 69 entitled, "This Is A New Day For Joe," and sponsored by Georgia Power Co. The ad argues for rates increases. Yet on Georgia Power's 1973 FPC accounting form, neither this ad nor any other of the many, many on the rate increase controversy in Georgia are listed as non- operating political advertising expenses under subaccount 426.4. Georgia Power's treatment of the ad must be compared with the similar ad, exhibit 71, by Florida Power and Light Co.-that company told Senator Hart that it considered its rate increase ads to be a non- operating expense, and nondeductible under the tax laws. Georgia Power is not alone, of course. Our favorite friend, the Electric Companies Advertising Program (ECAP) is sponsoring a nationwide campaign attempting to explain the "combination of circumstances [which] inevitably means increases in electric rates." Exhibit 51 is entitled, "Ann's job wouldn't exist without elec- tricity; would yours ~" It tells consumers that increased plant expansions require increased rates and that, "We ask your understand- ing of this inescapable fact." Yet, again, none of the members of the Southern System list this ad as a political expense on their FPC accounting forms, though all are members of ECAP. The correct tax tre~rtment of rate increase ads is more difficult to predict here. In many cases a rate increase controversy often involves a request to the State legislature for loans or grants; that is, Con- PAGENO="0016" 50 solidated Edison has recently appealed to the New York State Legisla- ture for aid. But if the rate increase controversy seems far removed from a legislative forum and is confined to State utility commissions or courts, a strict reading of the current IRS regulations might seem to permit deductibility. The last subject matter of the ads which I will discuss involves comprehensive schemes for solving the energy crisis. Many companies do not focus on any one solution to the energy crisis, but instead offer comprehensive plans which combine most of the aforementioned controversial suggestions plus a few others of similar nature. In such cases, the ads relate to numerous legislative bills on wicleranging energy and environmental matters. Some of these ads are listed on the display chart. For example, in 1972, the American Electric Power System placed an ad, exhibit 73, entitled, "Mr. President, We Agree With Your Message On The Energy Crisis." The ad calls on the President and the Congress to modify powerplant sulfur dioxide emission standards under the Clean Air Act and permit for strip mining for coal on Federal lands in the Far VVest. The ad also endorsed the President's "directive banning the con- version of powerplants from coal to oil" and his' "efforts to speed up nuclear powerplant construction and licensing." It is hard to accept. therefore. that with legislation pending in Con- gress on all of these areas. American Electric Power classifies this ad as nonpolitical and claims it to be a legitimate business expense. Gulf, Exxon, Continental Oil, and General Motors have run simi- lar *ads which they classify as nonpolitical. Exhibit 14 from Gulf, entitled, "We can't talk our way out of the energy crisis," gives Gulf's proposed solutions to the energy crisis: offshore oil drilling, construc- tion of the Alaska pipeline, deepwater ports for supertankers, in- creased nuclear energy, and commercial development of Federal energy reserves. In exhibit 6, Exxon asks, "Why energy is short in the United States" and blames the crisis on a failure to use coal because of `tough Clean Air Act sta.ndards, delayed construction of nuclear power plants, and delayed offshore oil drilling in the Santa Barbara Channel and elsewhere. The ad concludes, "We need to get on with the job of developing all of the country's energy sources-coal, nuclear power, oil and gas. We've run out of time for debate and delay. Don~t you agree?" In exhibit 5, Continental Oil states that, "America faces serious energy shortages this winter * * ~" It calls for "an all-out effort to expand domestic energy resources," including increased strip-minin of coal, relaxed mine safety laws-one wonders how much more relaxe they can be-a reexamination of environmental standards, a tempo- rary freeze on Clean Air Act standards, and mandatory gas and fuel rationing. CONOCO concludes that "it is up to industry to work hand-in-hand with the Government" on these matters. I am sure that is occurring. In exhibit 93, General Motors advocates_ As a general national policy: (1) de-regulation of %the wellhead price of new natural gas; (2) an immediate increase in imports of crude oil and refined prod- nets; (3) construction of pipelines, supertankers, deepwater ports and off- PAGENO="0017" 51 shore terminals; (4) greater domestic exploration and the prudent drilling for oil and gas offshore and beneath public lands; and (5) rapid development and licensing of nuclear power plants. None of these ads, none of them, and many, many others like them, were classified as political and nondeductible by the companies re- sponding to Senator Hart's letter, with one exception: Mobil Oil Co. For example, exhibit 29, entitled, "Is Anybody Listening? "-we have a huge exhibit on the chart here which I think most people have seen in the newspapers-advocates many of the aforementioned solutions to the energy crisis. This ad was categorized *by Mobil as political. Yet even Mobil's approach has some defects-exhibit 27, entitled "The Lady Was Listening," is intended to rebut many of the arguments raised by a woman who wrote Mobil in response to the solutions suggested by Mobil in exhibit 29, "Is Anybody Listening." Yet Mobil did not clas- sify "The Lady Was Listening" as political. At this point perhaps we might wonder if we have any laws regu- lating the tax treatment and FPC accounting treatment of political advertising. Fairness dictates, of course, that this subcommittee per- mit the energy-related companies discussed today to respond and justify their apparently incorrect view of the law. We are not talking about pennies in these cases-millions of dollars in taxable income and nonopeiating expenses of utilities are at stake. This subcommittee must also ask the Internal Revenue Service and the FPC why violations of Federal laws and regulations are appal- ently going unnoticed or unchallenged. More importantly, however, we are left with the sorry conclusion that just as the oil companies tried to buy candidates with illegal political contributions, the energy industry is trying to buy the minds of the American people by dominating the marketplace of ideas with political ads apparently financed by illegal tax and FPC accounting schemes. What policies underlie the tax and FPC treatment of political advertising? What justifies the current laws, even though they don't seem to be enforced? In its 1962 Cammarano decision, the Supreme Court rejected argu- ments that prohibiting tax deductions for business-related political ads constituted a violation of the first amendment. A similar conclusion has been reached in regard to FPC treatment of political ads. Thus, leaving the constitutional issue aside, I would like to address one of the main policy arguments against granting tax deductions for political ads: the inherent inequality of access to the minds of the public between business and nonbusiness interests. In its brief in Caqmniarano, the United States argued that there has been "a continued congressional concern with the use of large sums of money to finance `the engineering of consent-' to `make' public opinions on matters of legislation-particularly where large economic interests are all on one side of the controversy." I don't think anyone would doubt here that that's the situation with the energy crisis. Moreover, no one could doubt that consumer, environmental, civil rights or similar groups-in contrast to the business community in general-simply do not have the financial resources to conduct massive 42-367-75----2 PAGENO="0018" 52 national grassroots advertising campaigns on dozens and dozens of important legislative matters. Although this inequality exists as well in terms of direct lobby- ing in the halls of Congress, at least there it is more easily safe- guarded against through registration and reporting of lobbyists and their activities, a legislative audience which is likely to be more aware than the general public of the facts surrounding controversial issues, and the normal ability of all sides of an issue to present testimony to congressional committees. This latter safeguard, I might add, is greatly diminished by the prohibition on appearances-such as my appearance today-by chari- table organizations unless invitations are extended. Section 1962(b) of the Internal Revenue Code and regulations thereunder which prohibit deductions for grassroots lobbying reflect a realistic view "that in the twentieth century legislative results can be seriously distorted by influences operating far from legislative halls. The effect of massive propaganda campaigns shouldn't be doubted. I was informed by a sta.ff member of Senator Harrison Williams' office that the Senator had received about 12,000 coupons from the bottom of an ad appearing in New York and New Jersey newspapers which called for amendment of the Clean Air Act in regard to auto emissions. So obviously, these ads are at least causing the Postal Service some additional problems and probably are having some in- fluence on congressional decisions. The desire to alleviate this inequality and its often decisive effect on the legislative process supports the current constitutional tax treat- ment of political ads sponsored by business interests who engage in debate with nonbusiness interests. As Justice Douglas. a champion of the first amendment as we all know, said in a recent Supreme Court decision, "A State (or Federal) tax law is not arbitrary although it discriminates in favor of a cer- tain class * * * if the discrimination is founded upon a reasonable distinction, or difference in State (or Federal) policy, not in conflict with the Federal Constitution. Justice Douglas, by the way, concurred in the Caqmmarano decision that prohibitions on tax deduction for Political advertising did not violate the first amendment. Other Federal laws recognize the inequality between business or other large financial interests, on one hand, and individuals, non- profit groups, or other less wealthy interests on the other hand. In sonic instances, these laws attempt to remedy the inequality by an absolute prohibition on an activity, rather than the more moderate approach under the tax laws whereby the activity is merely made more expen- sive. For example. Federal law prohibits corporations and labor unions from making certain political contributions to candidates in many Federal election campaigns. Mr. Justice Powell from the Su- preme Court, whom one would not identify as being necessarily in favor of environmentalists or consumers on one hand, nor in favor of business groups on the other hand, has reflected on a predecessor to this campaign law, and noted that "public and legislative interest has focused on limiting-rather than enlarging-the influence upon the elective process of concentrations of wealth and power." Congress has PAGENO="0019" 53 also recently been considering legislation to prohibit contributions of more than a definite sum of money to candidates for office in order to equalize participation in the political process. The Federal Communi- cations Commission requires broadcasters to provide free airtime to non-wealthy persons to counterbalance one-sided programming or ad- vertising on controversial issues of public importance. This is popu- larly termed the "Fairness Doctrine." It seems eminently reasonable that these same concerns should be reflected in regard to the ability of powerful financial interests to affect the legislative machinery through intensive propaganda campaigns. While the same policy also supports the FPC's accounting treatment of political advertising-that is, that the ability of wealthy, well- organized utilities to sway public opinion on controversial matters should be held in check-other important policies are also at stake in dealing with utility advertising. As the FPC recognized in In re Alabama Power Company, political expenses have a doubtful rela- tionship to the actual rendering of utility service. Moreover, it would be improper to classify political ad expenses in operating accounts because in the words of the FPC: It might seem to imply that such expenditures must in due course and without further question be paid by the ratepayer. Such an implication would be un- warranted and possibly unfair, in view of the fact that on politically controver- sial matters, the pinions of management and the ratepayer may differ decidedly. The unfairness would seem to be generated by the fact that con- sumers have no choice in regard to utility service-the States and the Federal Government have sanctioned monopolies to provide necessary services. While we can even question whether such monopolies should do any I?olitical advertising at all, at a minimum it seems unjust and discriminatory for these monopolies to use consumers' money guaran- teed to flow to utilities by set rates of return, in order to propagandize those same consumers. I think the following is a beautiful example of what we are talking about, Senator. The ultimate absurdity is illus- trated when we consider that some companies, like Georgia Power, per- mit the costs associated with utility ads which attempt to persuade ratepayers that a rate increase is needed to be passed along to rate- pa.yers in the form of increased rates. In other words, we are paying to have ourselves told that our rates ought to go up to finance in part the ads for which we are paying. Constitutional, as well as statutory questions, are raised by this abuse. Next, I would like to discuss administrative procedures which would help achieve enforcement of the current tax laws and FPC accounting rules. In light of the importance of enforcing current regulations on polit- ical advertising, and the poor job of enforcement apparently being done now, we must consider what better enforcement mechanisms might exist. Several possibilities merit serious consideration by the agencies concerned and by this subcommittee. First, labeling of advertisements and their submission to the IRS and FPC: Monitoring the thousands of advertisements sponsored each year by major industries is an enormous task. Even assuming that every ad could be gathered from various sources, there is presently no way to knOw of the tax or FPC acéounting treatment of each ad without an PAGENO="0020" 54 audit. The undesirability of spending already limited agency resources on such audits is a serious deterrent to enforcement of the law. These problems could be solved, however, by requiring advertisers to label each ad, at its bottom, for example, as "IRS/deductible" or "FPC/#930" to indicate that the ad is considered to be nonpolitical. Labeling requirements are not new, as evidenced by FTC and con- gressional treatment of cigarette advertising. Moreover, with their tax returns and FPC accounting forms, each advertiser should be required to submit a compendium of all advertising sponsored by it during the year in question, including a list of all costs associated with the pro- duction and dissemination of each ad. A second suggestion involves more specific guidelines to determine whether ads are political. In contrast to rather detailed guidelines and examples of hypothetical cases under other legislation, for example, involving the treatment of estate taxes, the IRS and FPC have done little to delineate the type of advertising campaigns which might be considered political. For pur- poses of the tax laws, the following factors, some suggested by Profes- sors Weaver and Cooper, might give some guidance: 1. Whether there is a reference, explicit or by implication, to some proposal currently pending before a legislative body. 2. Whether the subject matter is fairly discussed with a presenta- tion of pros and cons on disputable matters. 3. Whether the particular action or activity which the advertise- ment encourages is one which involves a conflict of business and non- business interests on a question of public importance. 4. Whether the problem discussed is suitable for legislative atten- tion, regardless of whether action or inaction ultimately results. 5. Whether the tone of the advertisement and the manner of presen- tation is Polemical. 6. Whether readers or listeners are invited to express their views. 7. Whether the nature of the activity addressed in the ad is such that the disparate financial and organizational resources of business will normally give business excessive power. 8. Whether the advertiser is pursuing the matter discussed in the ad in other forums, such as legislatures, public meetings, opinion poll- ing, courts. agencies, et. cetera. 9. Whether a person of average experience and intelligence would interpret the advertisement as an effort to gain support for the adver- tiser's position on some issue appropriate for legislative attention. Drawing upon these factors, no one of which should be controlling, and upon prior decisions, the agencies could offer their views on hypothetical cases. The third suggestion involves modifying the provision allowing deductions for institutional advertising. Currently, IRS regulations provide that expenses incurred for institutional or good will adver- tising shall be generally deductible provided that such ads are related to patronage the taxpayer might reasonably expect in the future. Both corporate taxpayers and the IRS appear to be interpreting the "patronage" requirement very broadly. First, the regulations define institutional advertising to include presentation of general social and economic views. Secondly, corporate taxpayers appear to take the posi- t.ion that any ad mentioning the taxpayer's name also satisfies the patronage requirement. This interpretation also seems to have been PAGENO="0021" 55 adopted by the IRS, which has not challenged the deductibility, it seems, of most of the "institutional" ads. Professor Cooper recommends reducing the availability of the in- stitutional advertising deduction. Specifically, he believes that in any case where the purported good will advertising presents social or economic views, or deals with a matter which might reasonably be expected to become the subject of legislation, it would probably be ap- propriate to presume that the ad is generally nondeductible. The bur- den would then be on the taxpayer to demonstrate that the ad had no substantial purpose other than to promote the sale of the taxpayer's goods or services, or to achieve some other ordinary and necessary business goal that properly supports deductions. This regulation would have the effect of in Professor Cooper's words, "restraining propaganda masquerading as goodwill advertising," which seems to be the situation with which we are faced. Another area would be better control over treatment of dues and contributions to trade associations or similar industry-oriented groups. IRS regulations do not allow a deduction for a pro rata portion of dues paid by a taxpayer to a trade association if a substantial part of the association's activities involves grassroots lobbying. The IRS at one time indicated that a 5-percent test would be used to determine what constitutes a "substantial amount" of impermissible activities. That is if the industry group was expending 5-percent of its money to do lobbying, deductions to that group on a pro rata basis by cor- poi'ate members would not be deductible. Professor Cooper points out that the 5-percent nile does not aid in determining whether the test is based on man-hours, dollars of ex- penditure or some other criterion. He recommends that the substantial- ity test be based on multiple factors including dollar amount, man- hours, and absolute amount of grassroots lobbying, and so forth. Moreover, when oil companies contribute to the American Petroleum Institute, or utilities to the American G-as Association or the electric companies advertising program, the members seem to rely upon their trade associations to properly apportion contributions and dues among deductible and nondeductible categories. Thus, a comprehensive audit must include an audit of the trade groum as well as its individual members. The burden on the IRS of the FPC to conduct such investi- gations could be eliminated by requiring each trade association to label its ads, report all costs associated with each ad, and file a compendium of its ads with each agency. as the individual members would be re- quired to do. Next, and perhaps this goes without saying, there is simply no ex- cuse for the FPC to have allowed utility companies to fail to properly itemize their political advertising exuenditures in subaccount 4~6.4. One reason for this might be that the companies have been doing th1s for years. We have examined the FPC forms that show this. - The companies probably see little reason to change. Strict penalties on violators would serve as a deterrent to the current sloppy, or per- hans intentionally misleading, approaches. Lastly. and I think this is most important~ we need a system whereby citizens could challenge treatment of political ads. The ultimate bene- ficiary of the tax and FPC advertising laws and regulations is the public; citizen input into decisions on important `controversial issues PAGENO="0022" 56 should not be dihiteci by industry propaganda campaigns financed through ta.x subsidies or utility rates. Hence, it is imperative that those whom the laws seek to P1otect should be able to enforce those laws. Moreover, there is a practical reason for allowing formal citizen complaints: Citizen groups which take a position adverse to that taken by an advertiser are often in a better position than the IRS or the FPC to asses an ad on a legislative matter. Groups like~ environ- mentalists or consumers are well aware of pending legislative pro- posals and the full range of corporate activities which are intended to influence those proposals. The Federal Power Act and FPC regulations recognize the valid- ity of these views and permit citizen complaints which must be an- swereci by utilities and for which there is appellate review of any adverse rulings. I want you to knOw, Senator, that we intend to take advantage of th~se provisions, based on the information we now have, ~n the very near future and will be acting in regard to the. FPC. In sharp contrast, however, the Internal Revenue Code and IRS regulations do not provide a similar procedure. The only formal means of complaining to the IRS about tax treatment of an adver- tisement is through the regulations providing for rewards for infor- mation relating to violations of tax laws. Under that law persons sub- mitting information leading to the detection of violations are given rewards, which is not and should not be our main concern. \~\Thile we intend to send our evaluation to the IRS in accordance with this provision, the regulation is nevertheless inadequate. We will never be able to learn whether the IRS finally agrees with our evalua- tion, and more importantly. even if that information were available, there is 110 express provision for judicial review if the IRS decides to permit the costs associated with these ads to be deducted. Only if the IRS decides against deductibility, that is against the advertiser, is there appellate review and that is at tile instance of the corporate advertiser. The inadequacy of the present scheme for citizen participation is illustrated by a 1971 occurrence in which former U.S. Senator Fred Harris wrote to IRS Commissioner Walters urging denial of a cor- porate tax deduction for dues paid by corporations to "Citizens for a New Prosperity"-CNP-a. group organized to promote the eco- nomic policies of the curreiit administration. CNP's activities included running full-page ads espousing' the success of present policies. Tile IRS Commissioner, Mr. Walters, replied to Senator Harris' letter stating that "a determination as to the deductibility of amounts con- tributed must he made on the basis of all the facts and circumstances in each case * ~" According to the Senator, the full response "amounted to a~ fiat rejection of my suggestion." Similar t.rea~ment was accorded Mr. Richard Lahn, a `memi~er of the Sierra Club, who complained about the deductibility of a Washington Gas Light Co. ad. Mr. Lahn never learned of the eventual IRS treatment of that ad. There would seem to he no reason why the IRS could not adopt an administrative scheme which would provide for more meaningful citizen enforcement of the congressional policy against deductions for political advertising. If the IRS claims that it does not possess the power to set up that scheme, this subcommittee might consider amendments to the Internal Revenue Code in that regard. PAGENO="0023" 57 Last, since I have just dealt with the procedural changes, I would like to discuss what substantive administrative and statutory changes would more adequately remedy the problems associated with cor- porate political advertising. The current laws and regulations, even if fully enforced by the IRS and the FPC, do not adequately protect against possible abuses resulting from an inequality in access to the channels of communication. There are many important substantive changes which should be made in the present laws and rules to fur- ther safeguard against the effects of massive business propaganda cam- paigns and their subsidization by taxpayers and ratepayers. I will outline but a few of these changes now, and will submit to the sub- committee at a later date a more comprehensive memorandum which will also form the basis for action we plan to take before the IRS and the FPC in this regard. First, the IRS should readopt its pre-1965 regulations prohibit- ing tax deductions for costs associated with the exploitation of propaganda. As I have previously indicated, pre-1965 IRS regulations appear to have taken a broader view in favor of nondeductibility. Specifi- eal]y, expenses associated with "the exploitation of propaganda" were not to be deductible. Thus, a utility which advertises in favor of increased rates or a corporation which advertises in favor of the virtues of private enterprise and a laissez-faire economic theory now could arguably deduct the costs of that campaign as a business ex- pense. This would respresent a reversal of the IRS policy which was judicially approved in the Southwestern Electric Power Co. cas~ In that case, the court ruled that although the advertising in ques- tion was not primarily aimed at promoting or defeating legislation, its general arguments in opposition to expanded governmental intru- sion into .a private utility system constituted "exploitation of propa- ganda" which was not a legitimate business expense. The 1962 amend- ment t.o the Internal Revenue Code did not authorize the IRS to retreat from its rules recarding "exploitation of propaganda ~" and the IRS must be asked if a retreat has, in fact, becurred: if so, it should justify the change or else reverse itself again. At a minimum, however, the IRS rules should not permit deduc- tions for ads which attempt to influence the public, or members of administration a~encies~ on agency matters. While the 1962. amend- ment passed by Congress wa~ based, in part, on recognition of the then-existing policy that expenses for direct lobbying of a~'encies ucre tax-deductible, it left undisturbed IRS treatment of indirect lobbying of these agencies. We cannot doubt that independent agencies and those in the executive branch both exercise and broad legislative-type functions in many areas; even when they act quasi-iudicially~ their. standard is the "public interest," a broad one. The insidious effects of corporate advertising campaigns may be even more pronounced, and less visible, when regulatory agencies are the target than when the target is a more visible decisionmaking body such as Congress. If the IRS does not agree to amend its regulations to safeguard against these abuses, then Congress should modify section 162 (e) of the Code to effectuate these changes. Next, the. FPC's accounting classifications for advertising should be conclusive for ratemaking purposes in Federal . and State rate- PAGENO="0024" 58 making proceedings. Under present FPC accounting rules, an adver- tising expense listed in a nonoperating account may still be passed along to ratepayers in Federal as well as State ratemaking proceed- ings. With the advent of national advertising campaigns in news- papers and magazines and on network television, the accounting and ratemaking problems associated with classifying advertising costs have become too difficult for 50 different State agencies to handle. One can only imagine the Idaho Public Utility Commission attempt- ing to audit advertising costs incurred by Idaho Power Co. for ECAP ads which appeared in the New York Times or in Newsweek magazine. At a minimum, under the present Federal Power Act, as pre- sently constituted, the FPC's ratemaking jurisdiction over interstate transportation or wholesale sales of electricity provides a basis for exercising pendant jurisdiction over the advertising-related costs associated with intrastate consumer sales. If the FPC refuses to so act, Congress can require uniform ratemaking treatment of advertis- ing expenses by States and the FPC according to FPC rules by amending section 205 of the act. It is quite possible that the FPC already has express jurisdiction to set uniform ratemaking policies which would apply in State as well as Federal proceedings without the need to use the pendant jurisdiction theory. This would be based on a 1972 Supreme Court decision, Florida Power ~ Liqlit. In any event the FPC has not chosen to decide whether it has that jurisdiction. Under uniform rules the FPC could prohibit the cost of all political ads from being passed along to ratepayers and consumers. Rates not reflecting this policy would be classified as un- reasonable and discriminatory. The last suggestion I have for substantive change would require the FPC to require any utility engaging in political advertising to make response time or space available to ratepayers with opposing views at the expense of the utility. The ability of monopolistic utilities to effectively force ratepayers to subsidize propaganda campaigns with which they do not agree raises serious constitutional questions. As the Supreme Court said in the Red Lion Broadcasting case: It is the purpose of the first amendment to preserve an uninhibited ma rket- place of ideas in which truth will utimately prevail, rather than to counte- nar~ce monopolization of that market, whether it be by the government itself, or a private licensee. In response to these concerns, the FCC and Congress have required broadcast licensees to provide free response time to opponents of one- sided progTaming or advertising. The FPC should similarly require all utilities subject to its jurisdiction to subsidize response time or space for ratepayers with views contrasting with those expressed in utility company newspaper, magazine, television or radio advertising, or in utility bill inserts. At a minimum, the. fairness doctrine should be applied where the costs of such propaganda are borne by ratepayers as the result of State or Federal ratemaking proceedings. Yet, the fairness doctrine might even be applied where the costs of such ad- vertising are borne totally by shareholders, since the utility wo~ld otherwise be neglecting its mandate to protect its ratepayers as well as its stockholders if put its prestige behind the advertising of policies which rewarded its private investors at ultimate public expense. PAGENO="0025" 59 In conclusion, Senator, I would like to say that I think we have posed many questions which are only answered tentatively in this testi- mony, and there remain many other questions which I have not even addressed, such as the propriety of permitting tax deductions or FPC operating expense credit for advertising which promotes the use of energy when we are in the midst of an energy crisis. Perhaps if we have learned anything from your inquiry and this sub- sequent analysis, it is that there appear to be serious shortcomings in the ability or the desire of two important Federal agencies-the IRS and the FPC-to enforce current laws and regulations regarding polit- ical advertising. The resultant effect seems to be continued advertising abuses by many giants of American industry who have already caused us to mortgage our bodies and homes for their gasoline and electricity, and yet who now want us to give them our minds as well. To a large extent, the tools to prevent these abuses are already here; the memb&rs of this subcommitee, as well as all citizens, must ask why they are not being used by the agencies authorized to protect our rights. We, as taxpayers and utility rate payers, have an interest in insuring that millions of our dollars are not spent to subsidize one-sided polit- ical propaganda, and a greater interest in insuring that our demo- cratic system does not consequently fall into the hands of those with concentrated power and wealth who profess to bring "power to the people." I apologize for the length of the statement, Senator, and I thank you for permitting me to present it today. Senator HART. Mr. Shulman, thank you very much for an analysis of the problem we are considering, an analysis which is, I think, ex- tremely well researched. And comprehensive. I will unnerve you and our next witness, who I understand is a tax lawyer, by saying that you are talking to a lawyer, who, when the first suggestion of a tax problem surfaced in his practice always ran around the corner to get his partner who was a tax man. I early understood that I wa~s never going to understand tax law. It would be an utter waste of time for me to try. That's 25 years ago. And I discovered in the passage of time my understanding of it has be- come even duller. `So while I say that your research is magnificant and you have made a significant contribution to my understanding of the problem, I still identify myself as somebody who, when it comes to tax law, never got beyond, well, 4 or 5 times tables, certainly not up to 9 or 10. But the things you have discussed are certainly of enormous impor- tance to us as a people as we seek to identify the correct actions to take, both to protect the environment and to avoid disabling ourselves eco- nomically by a shortage or wastage of energy. And you correctly suggest, as I intended that we invite those whose advertising practices have been brought into question here to explain their view of it. Following that, theoretically, I should have a better understand- ing, probably I will be more confused than ever in any event. Intelli- gent readers can then make that kind of judgment. And I am not suggesting by indicating my desire that we suspend judgment until we have heard from the others any disrespect for your presentation. We welcome and appreciate it. PAGENO="0026" 60 Before turning to the questions, let me try to clarify a little further for the record some of the responses that have come in to the letter that you have indicated I sent. Several times you referred to the fact that a company, a given company or group of companies, did not characterize the ad in ques- tion as political or nondeductible. ~\Thile those statements are true, I think it appropriate to acid that in a number of situations, the corn- pa~iy responding rejected tile classifications in my letter. So in a number of cases \vhile it's true that the company didn't characterize the ad as nondeductible or political, neither did it classify the ad as deductible or political. I just wanted to characterize the ad in fashion-it simply went on to characterize the ad in a fashion. Also, on a number of occasions, you mentioned that Mobil did not deduct expenses for ads which others characterized as nonpolitical, and again that is a correct, accurate statement. But I would like to have tile record include the full text of Mobil's reply to my letter. Specifically, I would like it to show the following paragraphs of that response. Let me read the several paragraphs which I think are of special significance: For your convenience, there is enclosed a complete set of 1973 newspaper and periodic public service advertisements divided into four groups, the first three of which we believe and are advised constitute institutional or goodwill advertis- ing. Group IV contains advertising which we believe to be in the public interest, but which contain sufficient legislative poteiltial to be regarded by ourselves and outside counsel as possibly falling in tile non-deductible category, and are there- fore treated as non-deductible for tax purposes. Group IV. the non-deductible category, covers a variety of subjects including a number of advertisements grouped under tile general category of "the $66 billion mistake" relating in part to regulatory policies on antipollution control, and general information on the energy shortage. There are some 23 advertisements or brochures in this group. While none of these, ill the opinion of counsel, is clearly non-deductible, no absolute assurance can be given by counsel that a deduction would be upheld and therefore, as noted above, this group of advertisements is treated by tile Company as non- deductible. Tile letter in full will be presented. I think it will be useful. Now, I take it that you feel that a large number of tile ads which you submit as exhibits are nondeductible. Can you indicate what percentage of the ads, in your judgment should be treated as non- deductible? Mr. SInmxrAx. Senator, your letter of inquiry included questions on the tax treatment of 99 ads. Many of those ads which 37011 have submitted. before they were sent out as I understand it, were felt, I know hr ourselves when we gave them to the staff, and I believe by your staff, to be properly deductible. Of tile pile we originally dealt wItil (99 ads) we felt perhaps 15 or 20 of those might be deductible. Some of these are conservation ads, or Middle South Utilities acTs u-h~cll talk about how the Soutil is expanding economically. Let's say. working from a base of 80 remaining acTs, in my opinion-based 011 this analysis, extensive study of the iegislation pending in Con- gress, extensive research of prior IRS decisions and court decisions Oil tile matter-we have come to the conclusion that over 90 percent of those remaining ads probably should. be categorized as political and therefore nondeductible. PAGENO="0027" 61 So we are talking about an awful lot of money. Senator HART. I am told, and I have not had opportunity to read more than a very few of those ads, that only a few of them explicitly solicit the reader to write their Congressman to support or oppose spe- cific legislation. Rather, that the bulk of the ads do not mention the Congress or the fact that legislation is pending here on the subject that is discussed in the ad. Now, someone who would characterize these ads as deductible, I suspect, will say that an explicit solicitation to the reader to write his Senator or Congressman about identified legislation is needed before the ad becomes nondeductible. \\That test do you apply, how would you answer that argument? ~Ir. SI-JULMAN. As I suggested in my statement, Senator-and two well-known tax professors, Cooper and Weaker, incorporate some of these suggestions in law review articles they have written-one should not find any one factor to be controlling on the question of deducti- bility or nondeductibility. So for example- Senator HART. Yes, but if I understood your testimony don't they suggest that there should be a number of factors considered? Mr. SHULMAN. Yes, sir. Senator HART. Aren't they writing on the assumption that those multiple factors are not included and rather that only the solicitation to write your Congressman and the mention of 5. 2927 are the only things considered? Mr. SHULMAN. It is conceivable, although I can't think of an in- stance now where people would be asked to write their Representa- tives or Senators on matters not relating to legislation just to show them their views on, perhaps, supporting the President. Just because an ad said, write your Senator or Representative and let him or her know how you feel, wouldn't make that ad necessarily relate, to legislation. So that what I'm saying is that the tag at the bottom is really not controlling. On the other hand, I think, I hope we would all agree that ads which fall within some of the other factors-for example, that clear- ly discuss controversial items even though there isn't a tag at the bottom~ "u-rite your Representative or Senator"-those ads should be considered clearly to be nondeductible. Now. some of the ads which we have submitted are in fact of that sort.. The Phillips ad, in particular, is of that sort, but more im- portant., Senator. I think that that limited view of the IRS regula- tions and the Internal Revenue Code just isn't the law today. In a 1970 decision, the sixth circuit, in talking about advertising by Consumers Power Co., a Michigan utility, indicated that the cur- rent IRS regulations which talk about, "In connection with any at- tempt. to influence-" S~nat.or HART. Are you reading from- Mr. STTLLMAN. I'm reading from my statement. This is what the Congress 1?assedl in 1962, when it said that the new law in 1962 should not he construed as allowing deductions for any amount paid, quote, "in connection with any attempt to influence PAGENO="0028" 62 the general public or segments thereof with respect to legislative mat- ters, elections or referendum." Well, in C (4) now, the definition of-of influencing the general public on legislative matters-is included at the top of page 11. And the definition is that "promotion or defeat of legislation includes, in- cludes but shall not be limited to expenditures for the purpose of attempting to influence members of a legislative body directly or in- directly, by urging or encouraging the public to contact such mem- bers." Mr. KUNSTADT. I might point out in the language that section lit- tle "i" is the source of the test, the urging of contact of the Sena- tors. Since that is only given as an example, it's an improper inter- pretation of the regulations to say that that is a necessary test, and unless you meet that test, the ad is nondeductible. Senator HART. Does that Consumer Power Sixth Circuit case say that the- Mr. SHULMAN. Well, we have- Senator HART. That it is not inclusive ~ Mr. SHULMAN. We have two cases, Senator. In the sixth circuit, sir, a 1970 case, there were advertisement~ in which Consumers Power participated; the ads were sponsored, by ECAP. electric companies advertising program. I will quote in part from the court opinion: An examination of the materials used show that the advertising campaign had a twofold purpose: Explaining how electricity can make for more comfortable living, and pointing out the bad features of publicly owned electric power com- panies as compared to privately owned companies. The advertisements for which the district court disallowed deduc- tions were the ones which in some way attacked public power. Many of the disallowed advertisements made a hard-sell attack on public power, calling it creeping socialism, while others simply suggested that private power companies can provide faster service because, un- like the publicly owned power companies, there was no waiting to have funds appropriated for the needed electrical facilities. Many of the ads were directed toward the Tennessee Valley Author- ity. And several (this is important, several, but not all of them) admonished the public to let their Congressmen know how they felt about governmental ownership of electric power companies. The court recognized that in some instances where no legislation was pending, an advertisement which simply conveyed a competitive mes- sage should not be considered to be nondeductible. Nevertheless, in this case, even though there was no legislation pend- ing, and even though not all of the ads told readers to contact their Congressmen, these ads were in fact ruled nondeductible. A more appropriate case is a 1965 case in the Court of Claims, Southwestern Electric Power Co., in which the a ds. as I noted in my testimony, were intended to wa.rd off further Federal Government intrusion into a private utility system; no legislation at all was involved. The ads talked about socialism and Government ownership. The court says, referring back to the application of the Cammarano case. "legislation had already been pa.ssed in this case, so we cannot categorically say that the advertisements here were primarily aimed at promoting or defeating legislation. What then remains in the regu- lation which could deny deductibility? We think the important. lan- PAGENO="0029" 63 guage is this: The exploitation and propaganda including advertising other than trade advertising." In those ads, there was nothing that asked members of the public to contact their legislators. Again, though that is under the old regu- lation, it stands for the principle that to be a nondeductible business expense there need not be necessarily a line on the bottom asking that representatives be contacted. But, more importantly, as a practical matter, if we required that line to be present on all ads before the IRS would rule them to be nondeductible, we might not even need a tax law in that regard, be- cause companies would use the full text of their ads to lobby to their heart's delight, trying to leave this obvious conclusion in the mind of any intelligent person: if things are the way they are stated to be in the ad, the reader should do what is learned in sixth grade, and write his Senator or Representative and tell him or her to do something about it. Senator HART. I indicated that we ought to reserve judgment on the specific allegations, if that is a fair characterization, that you have made about some of these ads. There is one point, one statement in your testimony on which I don't have to be tentative or reserved at all. It is that, in your judgment, there is a legitimate function of Government to attempt to remedy the imbalance in the viewpoints that we in Congress do carry between the interests that can readily afford to buy an ad, and interests that somedays hasn't the money to buy the newspaper. And I think that it may not be sufficient merely to provide for tax disincentives for lobbying by organizations organized for profit. We may have to look in the direction of more favorable tax treat- ment for the lobbying efforts of those not organized for profit. That's a real slow-ball question to throw to you. How do you react to it? Mr. SHIJLMAN. I am in agreement, Senator, with your sugestion that charitable and educational organizations who possess vast amounts of expertise on matters pending in Congress should not have to be waiting in the wings somewhere for the golden opportunity that a staff member might find out about who they are and call them up and ask them to submit their comments to a congressional committee on pending legislation. It seems to me that, outside of providing an in- centive to such nonprofit groups, it just doesn't make any sense to pro- hibit people who know an awful lot about matters that Congress is dealing with from being able to express their views. Outside of that, I do agree that at least as regards direct lobbying, submission of statements to committees or members there of or testi- mony before committees, the restrictions on charitable organizations are unnecessary and unwise. And in fact, if Congress was concerned about a disequilibrium situation, inequal access, as you suggested, a good way to remedy that problem would be to open up the avenues to Capitol Hill for charitable organizations. Senator HART. In your testimony you have this paragraph: In its brief in Cammarano, the United States argued that there has been "a continued Congressional concern with the use of large sums of money to finance the engineering consent to make public opinions on matters of legislation, partic- ularly where large economic interests are all on one side of the controversy." That is the end of the quote from the case. And you continue- PAGENO="0030" 64 Moreover, no one could doubt that consumer, environment, civil rights or similar groups, in contrast to the business community, simply do not have the financial resources to conduct massive national and grassroots advertising campaigns on dozens of importantlegislative matters. To which anybody around here would say, sure that's true. But you have omitted a group, very large in number, with respect to whom it is dramatically true, and that's the poor. There is the extreme. The elimination of poverty would do lucre to reduce almost all the prob- lems that confront us in any other one single thing-race relations, health. And that's the one group who, by very definition, never will be able to run an ad to attract a nickel's worth of attention. So surely we should try to figure out a way to get some balance into that imbalance. Mr. BICKWIT. In your own view, does the media bear any responsi- bility for the imbalance that exists, and if so, what would you suggest that they do about it? Mr. SIIULMAX. I think we have to distinguish between the electronic media radio and television and the print media. There are different Federal regulations which apply to electronic media, whereas there are virtually no regulations applicable to the print media. I suppose that to a large extent, I believe, the media generally is doing a fair job of reporting both sides of the energy crisis in its news, documentaries, interviews shows, etc. I think the large imbalance results from the infusion of these billions or millions of dollars of commercial adver- tismg by oil and utility companies which are really a different sort of campaign, of information dissemination than the broadcaster-spon- sored programs. You have very, very dramatic ads which are intended to appeal to the emotions, rather than to any necessarily intellectual aspect of the individual. The press, and of course the broadcast media, shy away from presenting in their news similar emotional approaches to the presentation of counterinclustry views. I suppose if an environmental group w-antecl to buy an ad opposed to nuclear power and put. it On the television, if it could afford to do so, the station would run it. But the station is doing little to tone down the debate in some of the oil ads which we see on television. And I think it's the same for newspapers. I suppose the stations could make free advertising time available. This is what we requested in our FCC letter. And out of 6,000 stations we have written to, I think we have gotten responses from about 600, many of whom have agreed to run consumer-orientedl spots. But re- grettably, two networks, NBC and CBS, I believe, did not find the spots which your fellow colleagues in Congress provided the networks to be appropriate for presenting consumer viewpoints on the energy crisis. In the print media, as I say, there are no regulations or laws that really apply, although there have been some attempt by environmental groups, such as Environmental Action, to request counter ad space free of charge. A letter was sent from Environmental Action on March 4, to the ombudsman of the Washington Post, requesting that the Post give free space to an environmental group to present views opposed to some of the industry positions that we see on the "op. ed." page or similar places. As far as we know, as recently as last week, the Post hadn't replied affirmatively. Mr. BIGKWIT. I am sorry, I didn't hear that. PAGENO="0031" 65 Mr. SHTJLMAN. The Post has not replied affirmatively to this request. We know that some publications such as Playboy, and I believe Time, do devote free advertising space to citizen groups, but they are on generally noncontroversial issues. It's generally not the energy crisis. There is a vast array of things that could be done. I have just sug- gested a few that don't involve legislative remedies, but are really voluntary actions that might be taken. Mr. BICKWIT. If on reflection, some that do involve legislative reme- dies occur to you, it would be appreciated if you could make those available for the record of this hearing so that the members of this committee could study it. You have supported tax and FPC accounting disincentives with respect to grassroots lobbying. Presently there is in the Congress com- mittee legislation which would apply the accounting disincentives at least to promotional advertising by utilities in this time of energy shortage. I gathered from a closing remark that you do in fact sup- port that approach. Am I correct in that, and if so, could you elab- orate? Mr. SHULMAN. Yes, most definitely. I can't imagine, I don't see how anyone can imagine, the need for utilities to promote increased use, or any use of natural gas, electricity, or oil in a time when we are having problems keeping people warm in Michigan or Minnesota in the win- ter because there isn't enough oil to go around. So that an outright prohibition on promotional advertising might even be appropriate. Several State utility commissions have done this. At a minimum, it would seem to me the FPC ought to change the promotional adver- tising a~count from operating to nonoperating so that any promo- tional advertising which does occur would not be subsidized by rate- payers. This could be effectuated by legislation as well. If anyone thinks that utilities are not still promoting gas or electricity, well, one of the ads which the Senator sent out in his inquiry is by the Southern Co., exhibit 98. It's entitled "Misconception." I quote, "Misconception: it doesn't make sense for utilities to promote the use of electricity in the face of an energy crisis. Fact: energy must be available whenever and in whatever quantity needed. Customers require it." I won't read the whole ad, but essentially, what the ad says is that people really ought to use a lot of electricity this winter so that the use won't fluc- tuate, so that the company could make better use of its existing facili- ties. This ad was run last September. Yet as recentlyas last week, in a far more subtle attempt, the WTash- ington Gas Light Co., ran this ad in the Washington Post. You don't have a copy of it, so I will mark it exhibit 101, and give it to you. The ad is entitled, "Give Up Old Faithful, So You Can Give Up Oven Cleaning with a Modern Gas Range." The general text of the ad encourages people whose~old ovens now need replacement to replace them with new gas-powered, self-cleaning ovens. While I don't pro- fess to know very much about. self -cleaning ovens, from what. I under- stand, self-cleaning ovens, at least the electric type, require more electricity to do the cleaning in addition to the cooking. I assume it's the same thing with a gas self-cleaning oven. But more importantly, there is masqueraded in the ad a little paragraph at the bottom that says "Eligibility for gas service. In order not to jeoparidze the supply of gas for existing customers, no new applications for gas service are PAGENO="0032" 66 presently being accepted. However, if your home uses natural gas for any purpose, you are entitled to replace or add gas appliances." Obviously, this is an attempt to sell more gas appliances and to increase consumption of gas in individual households which are already using gas for more limited purposes. So promotional advertising is still going on. I don't know how this ad is classified. It probably is promotional and will be reported in FPC account 913 and will be a legitimate operating expense and probably passed along to rate payers. I don't think there is any rhyme or reason in that treatment. Mr. BICKwIT. I gathered from the remark the chairman made that he interpreted your analysis of Cooper & Weaver to support the proposition that under present law, the tag, "Write your Congress- man," is the only thing that is considered by the service and the courts in deciding whether an ad is deductible. I don't think that was the impression you meant to convey. Mr. SHULMAN. No, sir, I think by my quoting from Consumer's Power and Southwestern Electric, I meant to indicate that the tag in many cases is, in fact. irrelevant. The absence of a tag is irrelevant. Mr. BTCKwIT. If I understood you correctly, you didn't mean to convey that Cooper & Weaver think that is the only thing that is considered at this point as a relevant matter in deciding a question of deductibility. Mr. SHULMAN. That is true; they consider several factors. Mr. BICKwIT. On the Uo~wumer Power case, in that case, the court of appeals deferred to the judgment of the district court on a question of fact, did they not? Mr. SHULMAN. Yes, that is correct. Mr. BIoRwIT. Do you happen to know what the charge to the jury was at the district court level? I would doubt it, in view of the fact that it doesn't appear in the reported case. Mr. SHULMAN. Well, do you have the district court opinion, or the cite for the district court opinion? In case you don't, it's 299 Federal Supplement, page 1180. I believe this may not `be a jury case. I believe it may have been tried before a judge. In that case, there would obvi- ously be no charge to the jury. Mr. BIOKWIT. If it turns out that it was a jury case, it would be very useful for this record to know what the charge of the jury was. If that could be made available, we would appreciate it. Mr. SHULMAN. OK. However, looking quickly at the district court case, it says the case has been presented to the court on a stipulation of facts, supplemental stipulation of facts, testimony adduced at trial, and exhibits submitted with the stipulations and those introduced at the trial. The court has also had the benefit of a series of briefs sub- mitted by the parties seriatim. Plaintiff requests findings of fact `by the court-that is, the judge. In addition to those contained in the stipulation, a copy of the stipulation of facts and supplemental stipu- lation of facts is appended to this opinion. I will check, but I don't believe that this was a jury case. Mr. BIGRwIT. Your point is, as I gathered from your remarks to the chairman, that if it was a jury case, the charge could not have been PAGENO="0033" 67 that, unless you see a tag saying "write your Congressman," this ad is deductible. You can reason that from the holding of the case; is that correct? Mr. SHULMAN. I think that goes without saying. As I said, just from commonsense. Otherwise, every company that wanted to run a political ad would just omit the words, "write your Congressman." They might put in something, "what do you think?" They might say, "that's bad." There would be so many ways to circumvent the law that there wouldn't be any law to enforce. Mr. BICKwIT. And if it were a case decided by the judge, or a fact- finding of the judge, then his charge to himself could not have been the charge that I just gave you? Mr. SHULMAN. I think that's correct. Mr. BlcKwrr. I would like to thank the witness. Thank you, Mr. Chairman. Mr. SHULMAN. Thank you. Senator HART. There was one suggestion you had that I wanted to make a comment on. The Power Commission and IRS would have an overwhelming problem in auditing or reviewing the massive amounts of advertising, as you imply. But to permit them a better shot at insur- ing compliance with whatever the law is, why not require the ads to be labeled and identified, like, "not printed at public expense" on our mail- ing, which I am not sure is always literally true, either, but anyway, some slug line that would alert the reader as well as the Bureau or the Power Commission as to the deductibility of the ad. Then the com- panies would be required to include a compendium with their tax re- turn or Power Commission filing of the ads. Also, it seems desirable to encourage IRS to set up a number of hypotheticals to make it a more predictable business for the tax counsel. I see the desirability of it, but the usual uneasiness exists in promot- ing the proposition that you should be allowed to go into IRS and argue over the taxpayer's return. This is a very difficult thing to re- solve. There is a lot of complication. If life is ideal you could separate the specifics on the appropriate occasions and insure against abuse and go ahead. But I don't know whether we can. But the suggestion certainly should be considered. Thank you. Mr. SHULMAN. Senator, just one brief comment in that regard. The FPC already permits the rate pairs to come in and challenge treatment of advertising engaged in by utilities. And there hasn't been a great rush to the FPC door to police these things. Therefore, if that were permitted in regard to tax treatment of ads, and perhaps the incentive for reward removed so that the only basis for the challenge would be a belief that the ad was improprely trying to influence the legislative process, I really can't imagine waiting lines at the district court trying to challenge the services, tax treatment of these things. Thank you very much. Senator HART. Thank you for your interesting and thoughtfully prepared testimony. Mr. SH1JLMAN. Thank you. 42-367-75-----3 PAGENO="0034" 68 [The exhibits referred to follow:] ExHIBIT A CORPORATE PUBLIC SERVICE ADVERTISING JANUARY 28, 1974. DEAR -~- The Subcommittee on the Environment of the Senate Commerce Committee has received numerous inquiries about what has been termed corporate public service advertising. We have obtained some such ad- vertisements, copies of which are enclosed, which explain our current energy crisis and proposed solutions to it. We would be happy to receive copies of any of your other advertisements which you feel are particularly informative. After reviewing many of these advertisements, I have a few questions in- volving overall advertising costs and advertising terminology. Accordingly, I would appreciate your sending me the following specific information about your company's advertising efforts: (a) How much money did your company spend on all advertising in 1973? (1) Please break this down into product/service, goodwill (i.e., institutional), political (i.e., non-deductible as a business expense under IRS Regulation 1.162-20(c) (4)) advertising. (2) Please break this down for each medium (i.e., television, radio, newspapers, magazines, pamphlets and brochures, other). (b) What does the company consider to be public service advertising? (1) Is such advertising to goodwifi (i.e., i~nstitutional) advertising, thus ew- eluding product/service and political advertising? (2) How does the company consider each of the advertisements attached to this letter-as product/service, goodwill (i.e., institutional) or political (i.e., non-deductible) advertising? Would you please reply to this letter as soon as possible, but not later than February 6th. If you have any questions, please don't hesitate to let me know or contact Len Bickwit at (202) 225-9351. Sincerely yours, PHILIP A. HART, Ohairman, subcommittee on the Environment. EXHIBIT B On~ COMPANY ADs SENT TO COMPANIES FOR COMMENTS OIL COMPANIES OF AMERICA (API) 1. "How Can America Head Off Energy Shortages?" (Advocates offshore drill- ing and deregulation of natural gas.) 2. "Can America Have Enough Energy . . ." (Alaska pipeline, increased use of coal and nuclear power, have not been implemented because of economic and environmental considerations; the U.S. must take a more realistic approach to environmental problems.) ATL~&NTIC RICHFIELD COMPANY 1. "What Stands Between Our Nation's Energy Shortage . . ." (Advocates building of trans-Alaska pipeline.) 2. "Construction of the trans-Alaska pipeline . . ." (Advocates the building of the pipeline which it states has been designed to meet tough environmental standards.) CONTINENTAL OIL COMPANY 1. "Because of embargoes on petroleum exports . . ." (Advocates conservation of energy, rationing of scarce fuel, a sensible balance between environmental and energy needs, auto-emission remain at present levels, increased strip min- ing of coal, encourage trade relations for unrestricted trade in energy supplies.) . PAGENO="0035" 69 EXXON 1. "Why energy is short in the U.S. .. ." (Price of natural gas is too low, coal cannot be used because of Clean Air Requirements, nuclear power implementa- tion is being delayed, government policies have discouraged building of refineries.) 2. "Today, nuclear power supplies. . ." (Need nuclear power as soon as possi- ble; it has been delayed, in part, by environmental objections.) 3. "Exxon plans to spend nearly $10 billion . . ." (Explains where company will invest its capital and why it needs large profits.) 4. "Is North Slope Oil Really Worth the Risk?" (1971.) (Advocates construc- tion of Alaska pipeline.) 5. "Here on the North Slope of Alaska . . ." (1971.) (Broadcast.) (Worth the risk of capital to explore North Slope.) 6. "The Arctic wilderness is not always frozen . . ." (1971.) (Broadcast.) (Tundra can be restored after construction of rigs and roads, and living quar- ters in Alaska.) 7. "This is the Canadian Arctic near Alaska . . ." (1971.) (Broadcast.) (Pipeline will be environmentally sound.) GtJLF OIL CORPORATION 1. "Americans today are living in an atmosphere . . ." (Government regula- tion caused the shortage; U.S. needs development of nuclear power and research on nuclear fusion, development of fuels from oil shale and coal, geothermal, and solar, balance of environment needs protection and energy demand.) 2. "We can't talk our way out of the energy crisis." (Calls for offshore drilling, Alaskan pipeline, more refineries, deep water ports, increased use of coal, nuclear power, synthetic fuels and environmental needs must be balanced with energy needs, governmental support of long range research programs.) 3. "Ever Since the First Dawn . . ." (Broadcast.) (Nuclear power reactors supply safe, clean energy.) MOBIL 1. "Anyone who says the energy crisis . . ." (Composite of eight ads: "the gap," "the unnatural gas shortage," "to have and have not," "energy policy must be priority policy," "is anybody listening?" "so much to do, so little time," "Q: a gasoline shortage? A: yes, sad but true," "the unnatural gas shortage revisited." 2. "An open letter on the gasoline shortage to :" (All statements that the energy crisis are contrived are untrue. Political decisions have produced the shortage. We must build the pipeline, open the continental shelf for drilling, accelerate the construction of nuclear power plants.) 3. "Don't read these ads . . ." (Composite of four ads on profits.) 4. "Far out." (Advocates offshore exploration for oil and drilling.) 5. "Our Clean-seas policy is marine life insurance." (Advocates passage by Congress of a bill amending the International Convention for Prevention of the Pollution of the Sea by Oil.) 6. "So much to do, so little time." (It takes a great deal of money and time to develop energy supplies; we have lost them due to environmental fears con- cerning the Alaska pipeline and nuclear power.) 7. "We just spent three months' profits in one morning" (Money Mobil invests for federal lease to explore Gulf of Mexico must come from profits.) 8. "Capital formation: the great multiplier" (Profits are needed for invest- ment.) 9. "We're a big company . . ." (Profit is only 2 cents/gallon which is not so much when you consider how much we invest and the risks we take.) 10. "The gap" (To close the energy gap if we drill offshore, build the pipeline, produce synthetic fuels, build nuclear power plants, but environmentalists have stalled these efforts.) 11. "Q: A gasoline shortage? A: Yes. Sad, but true." (Advocates control of auto emissions in a way that won't waste gasoline, build Alaska pipeline, de- regulate natural gas, explore offshore drilling.) 12. "The lady was listening" (Takes position that development of energy resources can be coordinated with environmental goals if people strike a balance in their environmental standards.) PAGENO="0036" 70 13. "Are oil profits big? Right... (Need profits for capital investment.) 14. "Is Anybody Listening" (Oil companies warned the regulation of natural gas, delay in construction of pipeline, environmental fears, and delay in off- shore drilling would result in the energy crisis.) 15. "The $66 Billion Mistake . . ." (Grant a one-year extension for emission control and substitute California standards.) 16. "Same-Dangerous curve ahead . . ." (Adopt California standards, extend federal emission standards for one year and develop mass transit.) 17. "Same-Clean air and public transportation . . ." (Delay imposition of federal emission control standards, substitute California standards, develop public transportation system.) 18. "Same-The right question .. ." (Federal adoption of California emission control standards.) 19. "Same-California has a better way . . ." (Grant one year extension of federal emission control standards, adopt standards like Calif.; Congress should enact federal mass transportation program.) 20. "The unnatural gas shortage. . ." (Calls for deregulation of natural gas and miter continental shelf lease sales.) 21. "The unnatural gas shortage revisited. . ." (Advocates deregulation and increased offshore exploration.) 22. "Energy is industrial plasma. . ." (Need energy for growth and to main- tain standard of living, in order to produce energy we have to intensify offshore drilling.) 23. "Because that's where the oil is . . ." (Advocates increased drilling off- shore.) - PHILLIPS PETROLEtIM ~L. "America's best kept secret.. ." (Advocates adoption by federal government of Calif. emission standards.) 2. "Must this be the car of the future?" (People must change driving habits to avoid shortages.) 8. "The Energy Gap" (Solution to energy gap is a unified national energy policy including federal control by one adniinistrative unit; greater encourage- ment of domestic exploration; balance between energy and environment.) 4. "The energy crisis is no longer a prediction . . ." (Federal regulation of natural gas prices has discouraged discovery; environmentalists have slowed down pipeline oil and lease sales; exploration of Atiantic ocean; auto emission standards are too severe. Need to decontrol natural gas and balance environ- mental and energy needs.) SHELL 1. "Shell's preliminary earnings report. . ." (Explanation of why 1973 profits are up.) 2. "How in all conscience. . ." (Defends high profits as necessary for capital investment.) TEXACO 1. "Texaco earned $1.3 billion in 1973 . . ." (Need increase in earnings for investment.) 2. "We're not holding back anything. . ." (Says Texaco is supplying appro- priate federal and state authorities with data and the company is not holding back information.) UTILITY ADS SENT TO COMPANIES ron COMMENT EDISON ELECTRIC INSTITUTE 1. "Joseph Zagorski. . ." (Says nuclear power plants are safe.) 2. "A 10-story air cleaner . . ." (Says electricity needed to clean up environ- ment, advocates building new generating facilities.) 3. "Why does my electric.. ." (Advocates increased rates.) 4. "What's being done by the . . ." (Says more electric power plants should be built as soon as possible, discusses "better ways" to produce electricity.) ~. "Ann's job wouldn't exist without. . ." (Advocates increased rates. )` ~. "Liquid. . . gas. . . or solid.. ." (Advocates increased rates.)' ~t. Why shouldn't I be concerned . . ." (Says nuclear power plants are safe, and advocates speed-up in development and construction of nuclear power plants.) PAGENO="0037" 71 8. "Show and tell at the nuclear power. . ." (Says nuclear power plants are safe and advocates increased construction of nuclear power plants.) 9. "Mom's apple pie is radioactive." (Says nuclear power plants are safe, advocates increased construction of nuclear power plants.) MIDDLE SOUTH UTILITIES SYSTEM 1. "America is Strong-Enough electric energy for the. . ." (Discusses benefits of expanded utilities system in Alabama to be completed 1975.) 2. "America is Strong-Rationing of electric energy . . ." (Discusses what the system is doing "to prevent rationing of electric energy.") THE SOUTHERN COMPANY 1. "Water Cooler. (Discusses company's environmental protection facilities.) 2. "Power Playground". (Electric generating plants provide recreation lakes.) 3. "A Fish Story." (Says use of cooling lakes by electric generating plants provides fine environment for fish.) 4. "Misconception . . ." (Promotes electricity consumption in off-peak winter months.) 5. "A Pound of Beef . . v~~co 1. "The Energy Crunch: Energy Insurance . . ." (Conservation tips.) 2. "The Energy Crisis: VEPCO has invested.. ." (Supports research and de- velopment of alternative energy sources, advocates "economic nuclear energy.") COMMONWEALTH EDISON 1. "Looking for a great fishing hole . . ." (Says electric generating stations attract fish and are good recreation areas.) 2. "Conservation Department" (Advocates nuclear energy.) 3. "Anti-Pollution Device" (Says nuclear energy is safe and non-polluting.) CONSOLIDATED EDISON 1. "Report to the People of NYC . . ." (Advocates increased rates, off-shore drilling.) 2. "More Power to the People . . ." (Says new Con Ed hydroelectric plant in New York will supply nedeed energy while protecting environment.) GEORGIA POWER COMPANY 1. "Two reasons for an electric rate increase . . ." (Advocates electric rate increase.) 2. "This is a new day for Joe . . ." (Broadcast.) (Advocates increase in price of electricity.) 3. "You've probably heard that . . ." (Broadcast.) FLORIDA POWER & LIGHT 1. "Straight talk from FPL about a rate increase . . ." (From booklet.) (Ad- vocates rate increase.) [Not considered as an operating expense under Federal Power Regulations.] AMERICA'S RURAL ELECTRIC SYSTEMS 1. "We repeat: In solving America's energy crisis . . ." (Advocates R&D of alternative energy sources, and national policy on energy and resources.) AMERICAN ELECTRIC POWER SYSTEM 1. "Mr. President, We Agree . . ." (Advocates (1) modifying emission con- trols; (2) leasing public land in the west for coal mining; (3) speed-up of nu- clear power plants; (4) prohibiting the conversion of power plants from coal to oil (Energy Emergency Act § 106).) AMERICAN GAS ASSOCIATION 1. "The Alaskan pipeline . . ." (Advocates Alaskan pipeline.) 2. "Discover More Gas For America . . ." (Conservation tips.) PAGENO="0038" 72 3. "The energy shortage. . ." (Advocates offshore drilling, R&D, deregu- lation of natural gas and rate increases.) 4. "A gas well 5 miles deep-. . ." (Advocates higher prices for natural gas.) BROOKLYN UNION GAS, LONG ISLAND LIGHTING CO., NEW YORK STATE ELEC. & GAS CORP., IRIQUOIS GAS CORP., ROCHESTER GAS & ELEC. CORP. "Energy From the Sea . . ." (Advocates offshore drilling.) MISCELLANEOUS INDUSTRY SENT TO COMPANIES FOR COMMENT GENERAL ELECTRIC 1. "An attempt to bring the . . . " (Advocates nuclear power and discus~ion of alternative energy sources.) 2. "Facts that explain . . ." (Advocates and "explains" higher electric rates.) 3. "Zero growth in the electric industry . . ." (Argues that growth in elec- tric industry will raise standard of living and solve pollution problems.) 4. "At a time like this, . . ." (Argues that fluorescent lamps can save energy since they also have effect of heating buildings.) 5. "American Electric Power orders . . ." (Discusses new technology for transmission of electricity.) 6. "The energy crisis you've been hearing . . ." (Advocates goal justifica- tion and nuclear power plants, particularly foot breeder reactors.) 7. "The technology that gave you . . ." (Discusses GE's solid state equip- ment used in electricity transmission lines.) 8. "Less than 1% of the world's water . . ." (Discusses use of GE equipment and technology in fighting water pollution.) 9. "In ten years, . . ." (Advocates GE-designed nuclear power plants and gas turbines to produce electricity.) BETHLEHEM STEEL 1. "What some people are doing. . ." (Discusses use of steel for construction of nuclear breeder reactors and generating plants.) 2. "We have only one proven . . ." (Discusses proposed legislation on sur- face mining and says, "if unrea~onab1e restrictions on surface mining are en- acted . . coal users and steel users would be hurt.) UNIVERSAL OIL PRODUCTS 1. "Let's clear the air . . ." (Discusses benefits of catalysts and properly de- signed catalytic converters in reducing harmful automotive emi~sions.) GENERAL ATOMIC 1. "Introducing the new energy company . . ." (Advocates nuclear energy and discusses nuclear reactors.) GENERAL MOTORS 1. "The people who assemble GM . . ." (Discusses ways GM is trying to im- prove conditions of employee~.) 2. "Let's respond to the energy question . . ." (Advocates as a national policy: (1) deregulation of wellhead prices of natural gas, (2) immediate increase in crude oil importation, (3) construction of pipelines, super tankers, dry water ports, offshore terminals, (4) greater off-shore drilling, (5) rapid developing and di~scussing of nuclear power plans, and (6) stepped-up R&D in alternative sources of energy.) PAGENO="0039" 73 EXHIBIT Ci CHARTS OF CORPORATE RESPONSES MAJOR OIL COMPANY ADVERTISING, 1973 (AS CHARACTERIZED BY COMPANIES RESPONDING TO SENATOR HART'S INQUIRY) Total Company name expenditure Deductible a dvertising expenditures - Non. deduct- ible Product! service Goodwill! institutional Miscel- laneous Atlantic Richfield $9, 739, 357 $3, 386, 142 $6, 353, 215 Exxon 25, 064, 936 1 12, 532, 936 112, 532,000 Gulf (estimates) (15, 000, 000) (7, 500, 000) (7, 500, 000) Mobil 16, 158, 000 9, 047, 000 6, 282, 000 $829, 000 Phillips 28, 864, 474 4, 855, 469 3, 999, 005 Shell 22, 389, 000 11, 349, 000 3, 962, 000 3 $7, 078, 000 Texaco 27, 131, 000 9, 582, 000 17, 549, 000 Industry trade association: API 1,610,000 1,610,000 1 Approximately. $ Phillips' aggregate expenditure was listed by that company as being $10,000 higher than the sum of its individual parts. 3 Production costs. UTILITIES ADVERTISING, 1973 (AS CHARACTERIZED BY COMPANIES RESPONDING TO SENATOR HART'S INQUIRY) Deductible Total -________________________________ advertising Product! Goodwill! Miscel- Non- Company name expenditure service institutional laneous deductible American Electric Power Co $1, 411, 689 $235, 000 $983, 000 $194, 000 Brooklyn Union Gas Co 81, 400 81, 400 Columbia Gas of New York 31, 308 11, 940 19, 058 310 Commonwealth Edison 2, 639, 783 275, 373 2, 364, 410 Con Ed 1, 195, 000 1, 195, 000 Fonda Plower & Light 869,946 869,946 (1) Georgia Power Co 1, 410, 069 352, 802 814, 512 242, 755 Long Island Lighting Co 774, 000 380, 000 394, 000 Middile So. Utilities, Inc 453, 715 453, 715 National Rural Electric Coop. Association 229, 670 229, 670 New York State Electric & Gas Co 546, 674 77, 914 240, 751 228, 009 Rochester Gas & Electric 401, 480 27, 000 374, 000 Southern Co 591, 399 591, 399 Vepco 563, 402 164, 366 399, 036 Industry Trade Association: American Gas As- sociation 6, 374, 000 2, 834, 000 3, 540, 000 MISCELLANEOIS INDUSTRY ADVERTISING, 1973 (AS CHARACTERIZED BY COMPANIES RESPONDING TO SENATOR HART'S INQUIRY) Allegheny Airlines $4, 253, 284 $4, 092, 284 $161, 000 Beech Aircraft 1, 785, 795 1, 785, 795 9 2 60, 000 Bethieham Steel (3) (4) (5) General Atoniic__._ 230,000 230,066 General Motors 243, 000, 000 e 238, 140, 000 0 4, 860, 000 General Electric (~) United Airlines 28, 070, 000 28, 070, 000 1 FPL did not deduct the "ad" sent, they considered it a below-the-line deduction. 2_Included in fiscal year 1974 accounting. 1_Not provided. Two-thirds of advertising expenditures. 5 One-third of advertising expenditures. Estimate. PAGENO="0040" 74 EXHIBIT D ALASKA PIPELINE S. 2726. To reform the mineral leasing laws, (October 20, 1971.) S. 970. To deal with the current energy crisis and the serious shortages of petroleum products facing the Nation and to authorize construction of the trans- Alaska pipeline. (February 21, 1973.) H.R. 8774. To deal with the current energy crisis and the serious shortages of petroleum products facing the Nation and to authorize construction of the trans- Alaska pipeline. (June 18, 1973.) H.R. 8108. To deal with the current energy crisis and the serious shortages of petroleum products facing the Nation and to authorize construction of the trans- Alaska pipeline. (May 23, 1973.) H.R. 6756. To deal with the current energy crisis and the serious shortages of petroleum products facing the Nation and to authorize construction of the trans- Alaska pipeline. (April 9, 1973.) H.R. 9073. To deal with the current energy crisis and the serious shortages of petroleum products facing the Nation and to authorize construction of the trans- Alaska pipeline. (June 29, 1973.) P.L. 93-453. To amend section 28 of the Mineral Leasing Act of 1920, and to authorize a trans-Alaska oil pipeline, and for other purposes. (November 16, 1973.) COAL GASIFICATION AND LIQUEFACTION H.R. 220. To create a corporation for profit to develop commercially feasible processes for the conversion of coal to crude oil and other liquid and gaseous hydrocarbons, and for other purposes. (January 3, 1973.) H.R. 9694. To further energy research and development by establishing a Coal Liquefaction Corporation; to amend the National Science Foundation Act of 1950 and to authorize and direct the National Science Foundation to fund basic and applied research related to energy and thereby support the objectives of the Coal Liquefaction Corporation; and for other purposes. (July 30, 1973.) H.R. 9691. To further energy research and development by establishing a Coal Gasification Development Corporation; to amend the National Science Founda- tion Act of 1950 and to authorize and direct the National Science Foundation to fund basic and applied research related to energy and thereby support the objec- tives of the Coal Gasification Development Corporation; and for other purposes. (July 30, 1973.) COAL-INCREASED USE AS AN ENERGY SOURCE H.R. 12045. TO increase the production, transportation, and conversion of coal as a source of energy. (December 19, 1973.) H.R. 12121. To increase the production, transportation, and conversion of coal as a source of energy. (December 19, 1973.) CONSERVATION OF ENERGY H.R. 11714. To provide for the development of improved design, lighting insula- tion, and architectural standards to promote efficient energy use in residential, commercial, and industrial buildings. (November 30, 1973. Reported with amend- ment, committed to Committee of Whole House on State of the Union, and order to be printed. December 14, 1973.) DEREGULATION OF NATURAL GAS H.R. 2866. To provide for the deregulation of natural gas. (January 24, 1973.) S. 1549. To amend the Natural Gas Act to provide that provisions of the Act shall not apply to certain sales in interstate commerce. (April 12, 1973.) 5. 992. To amend the Natural Gas Act in order to expand the jurisdiction of the Federal Power Commission under such Act. (February 26, 1973.) 5. 2305. To amend the Natural Gas Act to extend its application to the direct sale of natural gas in interstate commerce, and to provide that provisions of the Act shall not apply to certain sales in interstate commerce. (August 1, 1973.) PAGENO="0041" 75 ELECTRIC POWER-INCREASED EFFICIENCY HR. 5650. To promote commerce and amend the Federal Power Act to es- tablish a Federal power research and development program to increase effi- ciencies of electric energy production and utilization, reduce environmental ha- pacts, develop new sources of clean energy, and for other purposes. (March 14, 1973.) H.R. 4997. To promote commerce and amend the Federal Power Act to es- tablish a Federal power research and development program to increase effi~ ciencies of electric energy production and utilization, reduce environmental im- pacts, develop new sources of clean energy, and for other purposes. (Feb- ruary 28, 1973.) EMISSION CONTROLS-VEHICLES, SMOKESTACKS H.R. 9210. To provide information for more effectively dealing with national energy problems by directing the National Science Foundation to conduct a study of emission control equipment and techniques applicable to the smoke- stacks of coal-burning powerplants and offer recommendations for their im- provement. (July 11, 1973.) H.R. 1773. To amend the National Emissions Standards Act in order to conserve fuel. (December 4, 1973.) IT.R. 11930. To amend the National Emissions Standards Act in order to conserve fuel. (December 12, 1973.) H.R. 11950. To amend the National Emissions Standards Act in order to conserve fuel. (December 13, 1973.) EI.R. 12062. To suspend motor vehicle emissions and fuel standards for the duration of the energy crisis in order to conserve fuel. (December 20, 1973.) ENERGY EMERGENCY ACT-VETOED H.R. 12132. To amend the Economic Stabilization Act of 1970 to eliminate price controls of petroleum and petroleum products. (December 21, 1973.) 5. 2589. To declare by congressional action a nationwide energy emer- gency; to authorize the President to immediately undertake specific actions to conserve scarce fuels and increase supply; to invite the development of local, State, National, and international contingency plans; to assure the continua- tion of vital public services; and for other purposes. (December 17, 1973.) TABLE OF CONTENTS TITLE I~ ENERGY EMERGENCY AUTHORITIES Sec. 101. Purpose. Sec. 102. Definitions. Sec. 103. Amendments to the Emergency Petroleum Allocation Act of 1973. Sec. 104. Federal Energy Administration. Sec. 105. Energy conservation. Sec. 106. Coal conversion and allocation. Sec. 107. Regulated carriers. Sec. 108. Delegation of authority. Sec. 109. Administration. Sec. 110. Prohibited acts. Sec. 111. Enforcement. Sec. 112. Grants to States. Sec. 113. Fair marketing of petroleum products. Sec. 114. Voluntary energy conservation agreements. Sec. 115. Prohibitions on unreasonable allocation regulations. Sec. 116. Use of carpools. Sec. 117. Prohibition on price gouging. Sec. 118. Importation of liquified natural gas. Sec. 119. Development of additional electric power resources. Sec. 120. Antitrust provisions. Sec. 121. Comprehensive review of export and foreign investment policies. PAGENO="0042" 76 Sec. 122. Employment impact and worker assistance. Sec. 123. Exports. Sec. 124. Prohibition of peroleum exports for military operations in Indochina. Sec. 125. Report and termination date. Sec. 126. Reports on national energy sources. Sec. 127. Development of processes for the conversion of coal to crude oil and other liquid and gaseous hydrocarbons. TITLE II: COORDINATION WITH ENVIRONMENTAL PROTECTION REQUIREMENTS Sec. 201. Suspension authority. Sec. 202. Implementation plan revisions. Sec. 203. Motor vehicle emissions. Sec. 204. Conforming amendments. Sec. 205. Protection of public health and environment. Sec. 206. Energy conservation study. Sec. 207. Reports. Sec. 208. Recommendations for siting of energy facilities. Sec. 209. Fuel economy study. Sec. 210. Fuel allocations. GEOTHERMAL-RESEARCH AND DEVELOPMENT ILR. 4413. To promote the exploration and development of geothermal re- sources through cooperation between the Federal Government and private enter- prise. (February 20, 1973.) HR. 4963. To promote the exploration and development of geothermal re- sources through cooperation between the Federal Government and private enter- prise. (February 28, 1973.) H.R. 8628. To further ellergy research and development by establishing a Geo- thermal Energy Development Corporation; to amend the National Science Foun- dation Act of 1950; and to authorize and direct the National Science Foundation to fund basic and applied research related to energy and thereby support the objectives of the Geothermal Energy Development Corporation; and for other purposes. (June 13, 1973.) H.R. 9658. To further energy research and development by establishing a Geo- thermal Energy Development Corporation; to amend the National Science Foun- dation Act of 1950; and to authorize and direct the National Science Foundation to fund basic and applied research related to energy and thereby support the objectives of the Geothermal Energy Development Corporation; and for other purposes. (July 30, 1973.) HR. 11212. To further the conduct of research, development, and commercial demonstration in geothermal energy technologies, to direct the National Science Foundation to fund basic and applied research relating to geothermal energy, and to direct the National Aeronautics and Space Administration to carry out a program of demonstrations in technologies for commercial utilization of geother- mal resources including hot dry rock and geopressured fields. (October 31, 1973.) LIQUEFIED NATURAL GAS-IMPORTATION ]ELR. 4430. To suspend the importation of liquefied natural gas ~nd the con- struction of new storage facilities for such gas until such time as a thorough evaluation of the hazards associated with the marine transportation and the delivery and storage of such gas is made and other actions are taken to prevent or minimize such hazards. (February 20, 1973.) H.R. 5755. To suspend the importation of liquefied natural gas and the con- struction of new storage facilities for such gas until such time as a thorough evaluation of the hazards associated with the marine transportation and the delivery and storage of such gas is made and other actions are taken to prevent or minimize such hazards. (March 15, 1973.) NUCLEAR POWER 1972, 1973, 1974 H.R. 13731. To amend the Atomic Energy Act of 1954, as amended, to require applicants for licenses to construct and operate utilization or production facili- ties to obtain a construction permit from the Atomic Energy Commission prior to commencement of construction, and for other purposes. (March 9, 1972.) PAGENO="0043" 77 H.R. 13732. To amend the Atomic Energy Act of 1954, as amended, to author- ize the Commission to issue temporary operating authorizations for production and utilization facilities under certain circumstances, and for other purposes. (March 9, 1972.) H.R. 12823. To amend the Atomic Energy Act of 1954 to provide for improved procedures for planning and environmental review of proposed nuclear power- plants, and for other purposes. (February 14, 1974.) H.R. 11957. To amend the Atomic Energy Act of 1954, *as amended, to re- structure the hearing process with respect to licenses to construct or operate utilization or production facilities. (December 13, 1973.) H.R. 13484. To amend the Atomic Energy Act of 1954, as amended to provide for approval of sites for production and utilization facilities, and for other pur- poses. (March 13, 1974.) HR. 11696. To amend the Atomic Energy Act of 1954 with respect to the grant- ing of awards for inventions or discoveries contributing to the development, use, or control of atomic energy. (November 30, 1973.) H.R. 8867. (Report No. 93-385) To amend the EURATOM Cooperation Act of 1958, as amended. (June 30, 1973. Committed to Committee of Whole House on State of the Union and ordered to be printed. July 19, 1973.) H.R. 8662. (Report No. 93-280) To authorize appropriations to the Atomic Energy Commission in accordance with section 261 of the Atomic Energy Act of 1954, as amended, and for other purposes. (June 13, 1973. Committed and ordered to be printed. June 14, 1973.) S. 2724. To establish a Federal Radiation Protection Agency, to transfer certain functions of the Atomic Energy Commission and other departments and agencies to such Agency, and for other purposes. (November 19, 1973.) S. 1994. (Report No. 93-224) To authorize appropriations to the Atomic Energy Commission in accordance with section 261 of the Atomic Energy Act of 1954, as amended, and for other purposes. (June 13, 1973. Reported without amendment. June 18, 1973.) P.L. 93-158. To amend Public Law 93-60 to increase the authorization for appropriations tO the Atomic Energy Commission in accordance with section 261 of the Atomic Energy Act of 1954, as amended, and for other purposes. (Novem- ber 26, 1973.) OIL IMPORT CONTROL PROGRAM H.R. 4193. To terminate the oil import control program (February 8, 1973.) H.R. 2674. Relative to the oil import program. (January 23, 1973.) H.R. 2311. Relative to the oil import program. (January 18, 1973.) H.R. 429. To terminate the oil import control program. (January 3, 1973.) H.R. 2732. To terminate the oil import control program. (January 23, 1973.) H.R. 2818. To terminate the oil import control program. (January 24, 1973.) H.R. 428. To terminate the oil import control program. (January 3, 1973.) H.R. 430. To terminate the oil import control program. (January 3, 1973.) S. 1019. To terminate the oil import control program. (February 27, 1973.) OFFSHORE DRILLING AND PORTS S. 2339. To establish the Santa Barbara Channel Federal Energy Reserve. (August 3, 1973.) H.R. 2288. To amend the Fish and Wildlife Coordination Act to require certain permits for exploring or mining oil and gas underlying the navigable waters of the United States. (January 18, 1973.) JLR. 11951. To authorize the construction and operation of high seas oil ports, to be located in the offshore coastal waters of the United States, in order to facilitate the importation of petroleum and petroleum products into the United States, and for other purposes. (December 13, 1973.) H.R. 10701. To amend the Act of October 27, 1965, relating to public works on rivers and harbors to provide for construction and operation of certain port facilities. (October 3. 1973.) RESEARCH AND DEVELOPMENT OF ALTERNATIVE FUEL SOURCES H.R. 10640. To establish a national program for research, development, and demonstration in fuels and energy and for the coordination and financial supple- mentation of Federal energy research and development; to establish development corporations to demonstrate technologies for shale oil development, coal gasifica- PAGENO="0044" 78 tion development, advanced power cycle development, geothermal steam develop- ment, and coal liquefaction development; to authorize and direct the Secretary of the Interior to make mineral resources of the public lands available for said development corporations; and for other purposes. (October 2, 1973.) H.R. 12027. To establish a National Energy Development Bank to provide loans and grants to finance urgently needed research, exploration, development, produc- tion, and delivery of energy resources within the United `States. (December 19, 1973.) cH.R. 8404. To establish a national program for research, development, and demonstration in fuels and energy and for the coordination and financial supple- mentation of Federal energy research and development; to establish development corporations to demonstrate technologies for shale oil `development, coal gasifica- tion development, advanced power cycle development, geothermal steam develop- ment, and coal liquefaction development; to authorize and direct the Secretary of the Interior to make mineral resources of the public lands available for said development corporations; and for other purposes. (June 5, 1973.) S. 1283. To establish a national program for research, development, and dem- onstration in fuels and energy and for the coordination and financial supplemen- tation of Federal energy research and development; and for other purposes. (December 7, 1973.) `S. 2636. To authorize supplemeutal appropriations for National Science Foun- dation Energy research and development. (October 30, 1973.) REsoLUTIoNs-SEI~cT C0MMIrrEE ON ENERGY RESOURCES INTERNATIONAL ORGANIZATION OF OIL IMPORTING COUNTRIES CII. Res. 194. Creating a select committee of the House to conduct a full and coni. plete investigation of all aspects of the energy resources of the United States. (Feb. 6, 1973.) II. Res. 80. `Creating a select committee of the House to conduct a full and com- plete investigation of all aspects of the energy resources of the United States. (Jan. 3, 1973.) `H. Res. 44. To authorize a study of national fuels and energy policy. (Janu- ary 3, 1973.) `H. Res. 127. Creating a select committee of the House to conduct a full and com- plete investigation of all aspects of the energy resources of the United States. (Jan. 11, 1973.) ~EE. Res. 403. Requesting the President to enter into negotiations with major oil importing countries to establish an international organization of oil importing countries and to establish common practices and policies affecting oil pricing, importation, and consumption. (May 21,1973.) H. Res. 533. Requesting the President to enter into negotiations with major oil importing countries to establish an international organization of oil importing countries and to establish common practices and policies affecting oil pricing, importation, and consumption. (September 5, 1973.) SHALE OIL ILR. 9693. To further energy research and development by establishing a Shale Oil Development Corporation; to amend the National Science Foundation Act of 1950 and to authorize and direct the National Science Foundation to fund basic and applied research related to energy and thereby support the objectives of the Shale Oil Development Corporation; and for other purposes. (July 30, 1973.) SOLAR HEATING AND ENERGY H.R. 9696. To establish an Office of Solar Energy Research in the Department of the Interior, and for other purposes. (July 30, 1973.) H.R. 11027. To provide for the early commercial demonstration of the tech- nology of solar heating by the National Aeronautics and Space Administration in cooperation with the National Bureau of Standards, the National Science Foundation, the Secretary of Housing and Urban Development, and other Fed- eral agencies, and for the early development and commercial demonstration of technology for combined solar heating and cooling. (October 18, 1973.) PAGENO="0045" 79 STRUCTURE OF OIL INDUSTRY H.R. .9266. To amend the Securities and Exchange Commission Act of 1933 to authorize the Securities and Exchange Commission to regulate the structure of certain corporations and other firms engaged in petroleum refining. (July 12, 1973.) SURFACE AND STRIP MINING H.R. 181. To provide for the restoration of all lands located in the United States upon which strip mining operations are being or have been carried out, and for other purposes. (January 3, 1973.) H.R. 2380. To provide for the regulation of strip coal mining, for the conserva- tion, acquisition, and reclamation of strip coal mining areas, and for other pur- poses. (January 18, 1973.) H.R. 12898. To provide for the regulation of surface coal mining operations, to authorize the Secretary of the Interior to make grants to States to encourage the State regulation of surface coal mining, and for other purposes. (February 20, 1974.) EXHIBITS Eh-1 THROUGH E-41 F.P.O. SUBACCOUNT 426.4 FORMS FROM SELECTED UTILITIES OF THE SOUTHERN SYSTEM Senator HART. The committee welcomes our next witness, Mr. Les- ter Fant, a partner in Cohen & Tlretz, a tax law firm, and tax specialist. Mr. Fant, if you were here earlier, I have already identified myself as an illiterate when it comes to the Internal Revenue Code. If I don't respond very promptly to your testimony, it will simply be that I never tried to fight the battle of understanding. STATEMENT OP LESTER G. PANT III, ATTORNEY, COHEN & TJRETZ, WASHINGTON, D.C. Mr. FANT. Mr. Chairman, I think that is a very modest disclaimer for you to make, and I am certain matters we are dealing with are completely within your comprehension, so I have no reservations caused by your disclaimer. Senator HART. All right, try me. Mr. FANT. Mr. Chairman, since you have already identified me, I will not further identify myself for the record. I was asked by the subcommittee to make a study of section 162(e) of the Internal Revenue Code and the Treasury regulations issued thereunder, and to arrive at a judgment as to the application of these provisions to certain advertisements which have been introduced into the record as exhibits 1 through 99. I am grateful to the subcommittee for this opportunity to express my views. I believe that this matter has implications far beyond the tax provision which I will discuss and the dollars involved, even though the dollars involved could be quite substantial. I believe the subject of these hearings has a direct bearing on the health of our domestic society. There was a time when influence of each man's voice on affairs of state was determined by the rightness of what he said, and the persua- siveness with which he spoke. It was against this background that the 1 Were not reproducible and are In the committee files. PAGENO="0046" 80 first amendment to the Constitution of the United States was adopted, guaranteeing each man the freedom to express his views on political, social, and religious questions. In this age of modern communications, however, a man's influence upon affairs of state is determined not only by the rightness of what he says, and the persuasiveness with which he says it, but also by the amount of money which he is able and willing to spend in order to advance his views. The preparation and publication of advertisements, and other uses of communications media, are extremely expensive. And yet, a skill- ful media campaign is one of the most effective means of influencing the affairs of state. The well-financed supporter of a particular idea can make a more effective presentation, and can reach a greater audi- ence, than an individual of average means who might oppose that idea. Many subjects of governmental concern have a direct and tangible financial impact on business, whereas their impact on the lives of pri- vate citizens is diffuse and intangible. For example, the recreational and esthetic value of an unpolluted stream provides enjoyment to a private citizen, but gives him with no funds with which to finance a campaign to keep the stream clear. The businessman, who can reduce his costs by dumping untreated wastes into the stream, can use a part of his cost savings to engineer governmental approval of the dumping. Even governmental decisions which directly affect the finances of private citizens do not generate effective opposition to business pub- licity and advertising campaigns. For example, a change in the regu- lation of basic commodities, or the price support levels for agricultural products, might cost 20 million Americans an additional $10 per year, which is less than 3 cents per person per day. The same decision, however, generates an additional $200 million for the producers and suppliers involved. Business might reasonably al- locate 10 percent of this amount to a program of public relations and direct lobbying with which to secure the desired decision. If all business expenditures in such a campaign were deductible for Federal income tax purposes, business would have, in the foregoing example, $40 million to use to influence the American people and the Federal Government. Of this $40 million, $20 million, or 10 percent of the expected return from the decision in question, would come from the treasury of business, and $20 million would come from the Federal Treasury through a reduction in the taxes which business would other- wise pay. With such ftmds available, business can virtually overwhelm the will of the American people on any particular question. Notwithstanding the imbalance of power between business interests and private citizens, a substantive law prohibiting business from ex- pressing its views on governmental questions would seem foreign to a society dedicated to free speech. I am not prepared to suggest a resolution to the tension between the sound public policy favors equalizing the influence of private citizens and businesses on affairs of government, and the constitutional prohibition against limitations on free speech. I do, however, suggest that this is a problem which affects the health of our democratic institutions, and that it is a problem which merits further consideration. PAGENO="0047" 81 Short of a direct prohibition on expenditures by businesses for ad- vertising, there are measures which can reduce the imbalance of power I have described. In the example I gave, `business spent $40 million on advertising campaigns, of which $20 million came from treasury of business, and $20 million came from the Federal Treasury as a result of tax deductions to business resulting from claimning a $40 million deduction for the amount expended. Historically, in fact, the expenditures outlined above have been nondeductible for Federal income tax purposes, and consequently, none of the expenditures should come from the Federal Treasury. In the hypothetical discussed above, this means that if business is only `willing to spend $20 million out of pocket, then it could only con- duct a campaign which cost $20 million. Under section 162(e) of the Internal Revenue Code, expenditures for grassroots lobbying are nondeductible. I would like~first to put section 162(e) into the general context of the tax system, and to briefly review its history. Under the Internal Revenue Code, Federal income tax is com- puted by first determining the amount of all income from whatever source derived, received by a taxpaying entity, such as an individual or a corporation. From this gross income, deductions specifically enu- merated by Congress are allowed for the purpose of arriving at taxable income. The tax rate is then applied aganist taxable income, and the amount of tax produced is paid. It has often been stated by the courts that deductions are a matter of "legislative grace," and that taxpayers have no inherent claim to deduct from their gross income any amount not specifically allowed by Congress. - Many of the deductions allowed under the Internal Revenue Code are permitted for the purpose of computing an amount roughly equiva- lent to a taxpayer's net income, or net profit. Additional deductions, such as charitable deduction, the rapid amortization of pollution con- trol facilities, and medical deductions, are permitted by the Internal Revenue Code as an expression of a wide variety of public policies. Section 162 of the code permits, generally, a deduction from income for all the ordinary and necessary expenses paid or incurred during the taxable year on carrying on any trade or business. The general purpose of this section is to permit taxpayers to deduct all amounts, whatever they might be, which are spent in earning income, so that the tax will only be applied to the taxpayer's net income. Some expenditures which are made in earning income, however, are specifically made nondeductible under section 162 of the Code. In these instances a taxpayer's taxable income might exceed its net income, or net profit from business. One example of an expenditure which is paid in connection with a taxpayer's business, but which is nondeductible for income tax pur- poses is an expenditure for what is generally referred to as grassroots lobbying. Section 162(e), which disallows deductions for grassroots lobbying is not in the Internal Revenue Code for the purpose of determining the taxpayer's net income. Instead, the purpose of section 162(e) is to reduce the disparity between the ability of businesses and private citizens to engage in grassroots lobbying. PAGENO="0048" 82 Before analyzing section 162(e) in detail, however, I would like to point out the requirements that must be met before section 162 (e) becomes even relevant. In the first place, an advertisement, to be deductible at all under section 162, must be ordinary and necessary business expense. An example of an advertisement which is not an expense would be an advertisement which is part of a capital expenditure. For example, if a business published an advertisement urging that a county board of supervisors grant a necessary permit for the con- struction of a business facility, the cost of that ad might be considered a part of the cost of the facility when it was constructed. Under these circumstances, the business would not be entitled to a current deduction for the expenditure, but would be required to cap- italize the cost of the ad, along with the other costs of the facility and write them off over the useful life of the facility. The courts have held that the terms "ordinary" and "necessary" re- quire that an expenditure be "appropriate and helpful." An example of an advertisement which would not be appropriate and helpful would be one which did not bear the business name, or which promoted solely the personal interest of the shareholder of the corporation, or any taxpayer other than the taxpayer claiming a deduction for the cost of the ad. Treasury regulations hold that, in general, goodwill and institu- tional advertising, even though it does not directly promote the sales of a business product, is to be considered an ordinary and necessary business expense. Treasury regulations section 1.162-20 (a) (2) pro- vides that institutional or goodwill advertising which keeps the tax- payers' name before the public is generally deductible as an ordinary and necessary business expense, provided the expenditures are related to patronage the taxpayer might reasonably expect in the future. An example given in the regulations of goodwill advertising as ad- vertising which keeps the taxpayer's name before the public in con- nection with encouraging contributions to the Red Cross, or the pur- chase of U.S. savings bonds. In addition, the regulations specifically permit deductions for ex- penditures for advertising which presents views on economic, financial, social, or other questions of general nature, provided such advertising does not involve the type of "grassroots" lobbying which is prohibited under section 162(e). The regulations relating to goodwill and institutional advertising had their genesis in wartime, when many corporations sold all their products directly to the Government for the military effort, but sought to publish institutional or goodwill advertising in order to keep their corporate name before the public. It is easy to conceive of expenses for grassroots lobbying that satisfy the foregoing tests were it not for the specific prohibition in section 162 (e). An advertisement designed to influence private citizens and, indirectly, legislators, to take some action which which would increase a business profit, could easily be said to be an ordinary and necessary business expense for that business. Such expenditures would not be allowable as deductions, however, if they satisfied the tests for ap- plication of section 162(e) which prohibits deductions for "grass- roots" lobbying. PAGENO="0049" 83 Before leaving the sections of the regulations related to institu- tional advertising, I would like to point out that the general language that permits deductions for the cost of presenting views on economic, financial, or social questions does not override the prohibition against deductions for grassroots lobbying. It cannot be argued that the costs of advertisements in a lobbying campaign are deductible as goodwill advertising the advertisement also fall within the definition of grass- roots lobbying. The regulations make clear that the denial of deductions for grass- roots lobbying supersedes the allowance of deductions for institutional and goodwill advertising. I would like also to comment briefly upon the history of section 162(e). Regulations issued by the Commissioner of Internal Revenue in 1918, without specific statutory authority, denied deductions for expenditures for "lobbying purposes, the promotion or defeat of legis- lation, the exploitation of propaganda * * ~ The Supreme Court, in Textile Mill Securities üorp. v. Commissioner, which was decided in 1941, held that such regulations, as applied to direct lobbying efforts, were valid interpretations of the statutory requirements that a business expense be "ordinary and necessary" in order to be deductible. In Camiimarano v. U.S., which was decided in 1959, the Supreme Court again considered the validity of the regulations which denied deductions for grassroots lobbying. In the Cammarano case, the court considered the lobbying efforts of a wholesale beer distributor designed to block enactment of an initiative which would give the State a mo- nopoly on wholesale beer distribution and therefore terminate the tax- payer's business activity. This was a very clear case in which, from a strictly financial point of view, the expenditures would qualify as ordinary and necessary, be- cause, if the initiative were successful, it would be the end of the taxpayer's business. The Supreme Court, however, held that the amounts for grassroots lobbying spent were nondeductible. The Supreme Court relied heavily on the regulations. The Court held that since the regulations had been in effect for more than 40 years, and since during that 40-year period the taxing statute had been re- peatedly reenacted, the regulations had the force of law. The argument generally was that Congress knew how the Commissioner was inter- preting ordinary and necessary, and if Congress disapproved of this interpretation, they would have changed the law in one of the re- enactments of section 162. In Cammarano the taxpayer further argued that if the regulation was construed to deny the deduction, the regulation would amount to a limitation upon freedom of speech which would be prohibited by the First Amendment to the Constitution. The taxpayer cited various early cases in which the Supreme Court had held that various types of direct taxes upon the expression of views were unconstitutional. In response to this argument, however, the Supreme Court held: Petitioners [the taxpayers] are not being denied a tax deduction because they engage in constitutionally protected activities, but are simply being required to pay for those activities entirely out of their own pockets, as everyone else engag- ing in similar activities is required to do under the provisions of the Internal Revenue Code. Nondiscriminatory deniel of deductions from gross income to sums expended to promote or defeat legislation is plainly not "aimed at the suppression of dangerous ideas." Rather, it appears to us to express a determination by Con- 42-367-75----4 PAGENO="0050" 84 gress that since purchased publicity can influence the fate of legislation which will affect, direct or indirectly, all in the community, everyone in the community should stand on the same footing as regards its purchase so far aS the Treasury of the United States is concerned. Based upon this interpretation, the Supreme Court explicitly held that the denial of deductions for grassroots lobbying was consistent with the Constitution. The tax provisions we are considering do not bear the same constitutional handicaps that a direct prohibition upon business advertising might bear. Shortly after the Supreme COurt's decision in Cammarano, the Treasury Department issued new regulations which provided a greater elaboration of the rules disallowing lobbying expenses, and further provided for the pro rata disallowance of deductions for dues paid to labor unions and trade associations and other organizations en- gaged in lobbying. The Service, at the same time, began a more vigor- ous program of enforcement of the regulations. In the Revenue Act of 1962, however, Congress adopted section 162(e) which repudiated the regulation provisions denying deduc- tions for "direct" lobbying, but adopted into the Code the regula- tions denying deductions for "grassroots" lobbying. The provisions which made these changes originated in the Ways and Means Com- mittee, and were opposed by the administration. Under section 162(e) (1), deductions are allowed for "direct" lobby- ing, which is defined as direct appearances, submission of statements, and sending of communications to committees or members of legisla- tive bodies, with respect to legislation or proposed legislation of direct interest to the taxpayer. Dues paid to membership organizations, such as business leagues and labor unions, which are attributable to "direct" lobbying, are likewise deductible. Under section 162(e) (2) (B), how- ever, Congress drew a clear line between expenditures for direct lobby- ing and expenditures for grassroots lobbying. Section 162(e) (2) (B) states that no amount is deductible which is paid: In connection with any attempt to influence the general public or segments thereof with respect to legislative matters, elections, or referendums. The report of the Senate Finance Committee on section 162(e) (1) stated that it was felt that the deduction should be permitted for direct lobbying, which, as I stated earlier, is defined as lobbying expenses involved in direct contacts with members of the legislative bodies or their committees with respect to legislation which has a direct influence on the business of the taxpayer. The reason advanced by the Senate Finance Committee was that taxpayers could get deductions for communications with the excutive branch of the Government, or litigation before the judicial branch. Section 162(e) (1) equalizes the tax treatment of expenditure for communications with the executive, legislative, and judicial branches. provided they are also ordinary and necessary expenses. The principal reason for supporting the prohibition of deductions for grassroots lobbying is the desirability, which I discussed earlier, of reducing the disparity between the ability of individual private citizens, and business organizations, to influence the affairs of Government. The Supreme Court, as pointed out above, described this policy as one of achieving "tax equilibrium." Since the private citizen gets PAGENO="0051" 85 no deductions for expenditures made in opposition to water pollution, equilibrium is achieved if business organizations, desiring to dump untreated wastes in streams, likewise get no deductions for their pub.- licity campaign designed to achieve that end. The notion that "tax equilibrium" supports the denial of deductions for grassroots lobbying has been criticized on the grounds that if successful, the private citizen will receive recreational or esthetic enjoyment, but will not have to pay taxes to the Government on these nonfinancial gains. The rewards to business, however, are financial, and the business will pay taxes to the Government if it realizes taxable additional profits as a result of success in influencing the Government. Under this analysis tax equilibrium is achieved by allowing the deductions for grassroots lobbying and taxing the income realized by the business if the lobbying is successful. The foregoing argument ignores the fact that if private citizens were to receive some financial return, such as a statutory bounty, under the Refuse Act of 1899, this income would be taxable to the private citizen, just as business' financial rewards are taxable. In other words, the deductibility-the denial of the deduction for these expenditures is across the board and treats private citizens and businesses equally. Likewise, the rewards of such lobbying are treated equally since both business and private citizens pay taxes if they receive financial rewards from their lobbying efforts. Furthermore, even if it is accepted that the denial of deductions from grassroots lobbying is a deviation from strict tax neutrality, this deviation, as a matter of policy, is appropriate. Since business will receive financial rewards for its success in grassroots lobbying, it has a ready fund for use against private citizens seeking to protect rec- reational or esthetic interests. In addition, the rewards to business of favorable governmental action are often direct and measurable whereas the rewards to private individuals are indirect and diffused. For these reasons business has both the far greater motivation, and the far greater ability to conduct effective grassroots lobbying efforts in order to influence governmental actions. As a matter of public policy it is desirable to reduce business power by denying the deductions for grassroots lobbying, whether such denial results in tax equilibrium or a tax disadvantage to business. Before ending the discussion of tax equilibrium, I would like to point out the tax treatment of lobbying expenditures by other organi- zations recognized by the Internal Revenue Code. As we discussed earlier, a private citizen gets no deductions for either his direct lobbying or his grassroots lobbying. A business, how- ever, is entitled to a deduction for its direct lobbying, but not for his grassroots lobbying. Tax-exempt organizations are not concerned with the question of whether lobbying expenses are deductible, because they pay no taxes on their income. The tax treatment of contributions to these organizations is im- portant to the organizations and their donors. Charities and educa- tionri and scientific organizations lose their tax-exempt status if they engage in lobbying as more than an insubstantial part of their activity. PAGENO="0052" 86 Therefore, these organizations are basically precluded from en- gaging in lobbying. Action or social welfare organizations can engage in lobbying, but contributions to these organizations are nondeductible. Labor unions likewise can engage in this type of lobbying. Union dues, if they are ordinary and necessary business expenses, and if the union member itemizes his deductions, are deductible unless the union engages in lobbying as a substantial activity. If so, the union member can still get a deduction for the portion of his dues allocable to direct lobbying, but not for grassroots lobbying. Business leagues, such as the chamber of commerce, are treated similarly to labor unions. That is, deductions are allowed for dues which are ordinary and necessary business expenses to the member, and bear a direct relationship to the member's business unless a sub- stantial part of the activities of the business league are lobbying. In that event, the portion of the dues allocable th direct lobbying is deductible, but the portion allocable to grassroots lobbying is nondeductible. The denial of deductions for grassroots lobbying, as we discussed above, will a marginal impact at best. The funds used for this purpose must come solely from the business organization itself, with no con- tributions from the Federal Treasury. The significance of grassroots lobbying is such that businesses will freely spend from their own funds, because of the importance to them of the objectives to be obtained. I believe that as a matter of policy it is desirable to require business to pay for grassroots lobbying solely from its own funds, and that sec- tion 162(e) (2) serves an important function by marginally reducing that amount of grassroots lobbying engaged in by business. This func- tion is only served, however, if section 162 (e) is regularly enforced. With this background, I would like to review section 162(e) (2) and the regulations thereunder, and discuss its application to expenditures for advertising which are the subject of this hearing. As pointed out above, section 162(e) (2) is a limitation and only has application to expenditures which would otherwise qualify as ordinary and necessary business expenses. Section 162(e) (2) denies deductions for expenditures for grassroots lobbying if this expenditure satisfies the three tests set forth below. These tests I have determined both from the literal wording of the statue and the regulations, and also from my interpretation of con- gressional intent at the time or enactment of section 162 (e). 1. LEGISLATIVE MATTER Before an advertisement is considered grassroots lobbying, it must concern "legislative matters." An expenditure for advertisement would be allowable as a deduc- tion if the advertisement relates to something other than "legislative matters." In my opinion, the term "legislative matter" refers to matters which are appropriately the subject of legislation. I believe that an advertisement can relate to "legislative matters" even though no legislation is pending with respect to the subject of the advertisement at the time the advertisement is printed. PAGENO="0053" 87 The regulations do not define "legislative matters." The regulations which allow deductions for direct lobbying do, however, define the terms "legislation or proposed legislation" to include "bills and res- olutions introduced by a member of a legislative body, as well as oral or written proposals for legislative action submitted to a legsilative body or to a member of such body." The term "legislative matters" is literally broader than the terms "legislation or proposed legislation." I believe therefore that "legisla- tive matters" can, under some circumstances, include matters which are not the subject of pending legislation at the time the advertisement is run. The purpose of the denial of the deduction is to offset businesses' superior financial and organizational strength with respect to legis- lative matters. The need for this offset is as great when business is pre- paring the public for anticipated legislation as it is when such legis- lation is actually pending. Furthermore, business can, to some extent, control the timing of the introduction of the legislation favorable to the business, and can anticipate the introduction of legislation unfavorable to business. If section 162(e) (2) were only applicable when legislation was actually pending, it could `be avoided by first conducting extensive publicity campaigns to generate interest in the general public in the passage of legislation, and at the conclusion of such campaign intro- ducing the legislation itself. The fact that legislation is pending, however, is important proof that the subject of an advertisement is a legislative matter. 2. ATTEMPT TO INFLUBNCE GENERAL PUBLIC If an advertisement relates to a legislative matter, the advertisement must be considered in light of the second test, which is found in the statute, "Does the advertisement amount to an attempt to influence the general public?" Deductions are only disallowed under section 162(e) (2) for expendi- tures which amount to an "attempt" to influence the general public. The determination of whether an advertisement constitutes such an "attempt" can only be made by analyzing the advertisement itself to determine if, as a whole, a reader of the advertisement might be "influ- enced" with respect to a legislative matter. For example, an advertisement relating to a legislative matter could serve a purely educational purpose by fairly presenting all factors which support both sides of an issue, and leaving the public the ability to make up its own mind. An advertisement, however, which presents only one side of an issue, would appear on its face to be an attempt to influence the general public. The regulations cite attempts to encourage the public to contact members of a legislative body for the purpose of supporting or oppos- ing legislation as examples of grassroots lobbying. The reference to encouraging the public to contact legislators is an example, and I agree with the earlier witness that an advertisement which doesn't directly and literally encourage the public to contact legislators can still be an attempt to influence the general public within the meaning of the statute. PAGENO="0054" 88 The statute itself refers to attempts to "influence the general public." The general public can be influenced, and the statute can become appli- cable, even if the public is not directly urged to contact legislators. I feel, however, that an "attempt" can only be found in an advertise- ment if the advertisement presents only factors which support the self- ish interests of business. For example, exhibit 39 is devoted to costs of clean air. The ad lists a large number of additional expenses which the public bears as a result of the Federal Clean Air Act. No mention whatsoever is made of the benefits which the public derives from the Clean Air Act. As a result, I feel that this ad can be readily classified as an attempt to influ- ence the general public, even though the ad does not directly call for the public to contact the Congressman. I base this in part upon my confidence in the degree of political edu- cation in our society and my belief that if an advertisement encour- ages an individual to feel great concern about a legislative matter, that individual knows that the way to express this concern is by contacting his legislative representative. An advertisement which generates such concern has the effect of causing the public to contact its representative even though there is no explicit instruction to do so on the face of the ad. The deductibility of an expenditure for an advertisement should be governed by the overall substance of the advertisement itself and not by the presence or absence of any particular key words such as "contact your legislator." The fact that an advertisement presents only one point of view and contains a request for the public to contact its legislators would appear to be almost conclusive evidence that these ads are an attempt to influ- ence the general public. I feel, however, that even absent this evidence, ads can be found to be attempts to influence the general public based on the factors I discussed. The two tests discussed above are the only ones found in the statute, and the only ones covered by the regulations. I believe, however, that there is a third factor which can be inferred from congressional purpose, which must be present before section 162(e) is applied to disallow deductions. The tests standing alone, as I have stated them, would deny the Washington Post a deduction for the cost of publishing its editorial page. The editorial page relates often to legislative matters and it is clearly an attempt to influence the general public. Congress did not intend to deny the newspaper the cost of preparing editorials. For this reason section 162(e) (2) should only be applied to expendi- tures in connection with matters in which the interests of business and a segment of the public at large conflict, and the advertisement pro- motes businesses' selfish interests. An editorial published by a newspaper for the purpose of promot- ing the newspaper's financial good at the expense of the general public, or of subscribers, could well be subject to disallowance under section 162(e) (2). On the other hand, an editorial relating to the subject in which a newspaper, as a business entity, has no interest that is distinctly differ- ent than any other member of the general public, should not be dis- allowed. For example, an editorial urging congressional ratification of an arms limitation treaty would not involve a matter in which the news- PAGENO="0055" 89 paper, as a business, has an interest different than that of the general public. A similar example might be an advertisement published by an oil company which urges the enactment of laws relating to automobile safety. In the matter of automobile safety, the oil company has no financial interest which, generally speaking, conflicts with that of the general public. On the other hand, an advertisement by an automobile manufacturer which opposes such legislation, might well involve a conflict between the financial interest of the business and the general public at large. It is my belief that the three foregoing tests should be applied to the advertisements published by businesses, and that expenditures for those advertisements which satisfy the three foregoing tests should be disallowed. There are two procedural points I would like to cover. First, the application of the factors I have outlined is essentially a factfinding process, and I believe that the determination of the initial finder of fact should be given great weight. This was done in the present case of Consumers Power Company v. United States, which was decided in 1970. In this case the u.S. Court of Appeals for the Sixth Circuit con- sidered ads published by private power companies which related to publicly operated power companies. Some also attacked public pow- er as "creeping socialism," and others pointed out that private com- panies provided better service. Some of the ads admonished the readers to contact their Congress- man, but some did not. There was no legislation pending at this time to which the ads were related. The District Court disallowed the de- ductions for expenditures on the grounds that these expenditures amounted to grassroots lobbying. The court of appeals expressed some reservations about the appli- cation of the regulations, and noted that in the ads concerned, there were some ads which the court of appeals felt were borderline cases, but the court of appeals deferred to the judgement of the district court and. sustained the disallowance of all of the deductions. I be- lieve that it is proper for appellate courts to give some weight to the determination of factfinders in cases such as these. A. second procedural point which I would like to mention is il- lustrated by some of the ads which have been introduced into evi- dence into this record. In particular, I make reference to exhibit 66, 76, 81, and 88. These are ads in which the three elements that I have discussed above are present, but only in a portion of the advertise- ment. I feel that in such cases in which the three elements occupy more than a de minimis part of the ad, that portion of the cost of the ad which can be fairly allocated to the grassroots lobbying should be disallowed. I have reviewed the advertisements which have been admitted into the record as exhibits No. 1 through 99, and applied to each one of them the three foregoing tests. Of the advertisement I reviewed, it is my opinion that 31 are deductible, 4 require some allocation because a portion of the expense should be deductible, and the remainder not, and there are 9 advertisements for which I felt I needed addi- tional information; that is, information in addition to the ad itself, in order to make a judgment. The remaining 51 ads, I felt were non- PAGENO="0056" 90 deductible for Federal income tax purposes, based solely on applica- tion of the factors that I described above to the ads themselves, and without the benefit of any other knowledge of facts and circumstances which might surround the publication of the ad. The advertisements for which I felt I needed additional information were 10, 11, 12, 15, 21, 22, 48, 91, and 94. The advertisements which I felt would be deductible under the three tests I have outlined above are exhibits 7, 9, 27, 40, 49, 51, 52, 56, 57, 58, 59, 60, 61, 62, 67, 69, 70, 71, 72, 75, 79, 80, 83, 84, 86, 87, 89, 92, 95, 98, and 99. The advertisements which I felt could be subject to some allocation were 66, 76, 81, and 88. I found all other ads to be nondeductible under section 162 (e) (2). In closing, I would like to say that I recognize the sponsors of these and other ads are subject to all the responsibilities, and have all the rights, which are inherent in our self-assessment system of income taxation. Taxpayers are not required to pay amounts of income tax greater than is required by law, nor are taxpayers required to resolve every question of interpretation against themselves. On the other hand, taxpayers have the responsibility, in the first instance, to make a good faith determination as to the application of the Internal Revenue laws to their business operations, and to com- plete their returns and pay their taxes accordingly. Expenditures for advertisements which represent clear attempts to influence the general public with respect to legislative matters are not deductible under section 162(e) (2). Such advertisements should not be misclassified by taxpayers as goodwill advertising and should not be claimed as tax deductions. The taxpayers are not, under the law, entitled to such deductions. I also feel that the Internal Revenue Service should vigorously en- force the congressional mandate and the Service's own regulations. It is true that consideration of the deductibility of advertisements might involve some questions which are outside the scope of normal auditing techniques. This is so, however, because the policy of section 162(e) (2) is based upon the broad consideration of public policy as I have outlined above. Because of the importance of these public poh- cies, I feel that the IRS and the taxpayers concerned have the duty to see that this section is carried~ out and vigorously enforced. Even though the policy does not relate to matters which are normally the sub- ject of income tax audits, the matters are more important, in my opinion than simply raising revenue for the Federal Government. They bear upon the quality of the decisions which are made by the legislative body. Senator HART. You were right, Mr. Fant. You have made the code understandable to me to the extent to which the code can be made understandable. Let me dispose of something that occurred to me as I listened to your suggestion that a third factor be included deter- mining the deductibility of an ad. It is the public matter, and seeking to influence opinion and deci- sion. You say that the two tests above standing alone would be applied to deny the Wa~shington Post a deduction for cost of writing and printing its editorial page since the editorial page relates often to legislative matters and is clearly an attempt to influence the general public. PAGENO="0057" 9.1 You did not intend to deny the newspaper the cost of preparing the editorials. I quite agree with that. For this reason, section 162(e) (2) should oniy be applied to expenditures in connection with matters in which the interests of business and the public at large conflict. And the advertisement promotes businesses and selfish interests. And suggestions that an editorial in a newspaper seeking to promote the newspapers financial good at the expense of the general public or its subscribers could well be subject to disallowance. That suggestion bothers me, because to take a newspaper, they edi- torialize against increased mail rates. They have a deep conviction that increasing the rates will drive some publications out of business, and lessen the opportunity to have broad public education. Who is to decide whether that `s an editorial-is in conflict with the public interest or not? Mr. FANT. Mr. Chairman, I agree with you that this is a tough question. In the example you have given relating to newspaper edi- torial concerning the cost of mailing, I would first want to determine whether an increase in the cost of mailing would reduce the business' profits, or whether it's the newspaper's view that the increase in the cost of mailing is undesirable because it might, as the chairman pointed out, affect the degree to which the views in the newspaper are dis- seminated and distributed to the public. If the latter is the case, I would feel that it would not be subject to disallowance. If the former were the case, that is, that an increase in mail rates could lead the newspaper to earn less profits than they earned before, I think we would have a tough problem, because I think that there would be two elements present, the one element which favors the dissemination of views, broadly, to the people and a second element, that the business is publishing the editorial so that it will make a greater profit. And I feel that it's very hard to say that Exxon cannot deduct the cost of a political advertisement which could in- crease its profits, whereas a newspaper could get su~h a deduction simply because the newspaper is a newspaper, and Exxon's an oil com- pany. I feel that would be a difficult issue to resolve. Senator HART. There is another kind of ad that presents the same problem, but in a less appealing setting than the newspapers' claim for freedom to discuss ideas. I believe that at least one automobile manu- facturer believes it's undesirable for several reasons to permit the law to remain as it is with respect to clean air standards, because the only way they can meet those standards is to add on a device called a catalytic converter. The ad says that the device is uneconomic, may prove very disap- pointing because of maintenance problems, and may contribute to an increase in economic concentration in the automobile industry. It advertises that a change of the law is needed. Now, I'm sure it would be true that if they didn't have to go to the converter, they would make more money or lose less. I think that they also believe that this is an add-on device that we will wish we hadn't hung our- selves with. This is an example of an ad that would give IRS trouble, isn't it? Mr. FANT. Mr. Chairman, ads very similar to that are included in the exhibits which are introduced into the record. PAGENO="0058" 92 I think one of them was published by an automobile manufacturer. My analysis of that situation would be as follows: Although the in- terests of the business might be something broader than the interest of increasing their profits by doing away with the catalytic converter, doing away with the catalytic converter might well conflict with the interests of the general public. I am certain that there are some individuals, and there is a viewpoint held which is that the catalytic converter is good. Senator HART. That's the dominant feeling. Mr. FANT. And that it is, I think, a pretty good example of the problem which I am discussing which is, I breathe clean air and it's good for my health, but it doesn't put any money in my pocket to try to get a law passed to keep the air that way. I think that is a case in which the business' selfish interest is advanced. Now, it's true that the business' selfish interest might coincide with what is perceived by other members of the public as being the broad national interest. But the conflict I think we are talking about is not b~ween business and everyone else, or at least how everyone else per- ceives their interest, but between business and some identifiable seg- ment of the public which opposes congressional action, which advances the selfish interests of business. It's possible that business' selfish interest in some cases will coincide with what is everyone's interests. But still, if this is an identifiable segment of the public which opposes business, I don't believe that busi- ness should be allowed to deduct the cost of their ads at the expense of those who oppose them. Senator HART. Well, I am glad I am not a tax lawyer and I am glad I am not the IRS agent that is examining these things. Mr. FANT. Well, Mr. Chairman, I am glad also that you are not a tax lawyer, because there is a great deal of competition even now, and also because I think we can all be grateful that you are where you are rather than spending your time with other matters. Senator HART. Let me have Mr. Bickwit direct some questions that have been developed. Mr. BICKWIT. Just on that last one, then, as I understand it, you are saying that 162(e) (2) should only be applied to expenditures in connection with matters in which the interests of business and an identifiable segment of the public at large conflict. Mr. FANT. That's right. Mr. BIOKwIT. It needn't be established that the entire public at large is in conflict with the business interest? Mr. FANT. Well, I think that the problem is that we don't know what the public's interest is, and it's the legislators who must deter- mine that. There is no such thing as the public interest. It's the com- peting interests within the public. And I think what I intend to refer to is a subject in which the selfish interest of businesses compete with some interest of an identifiable ~segment of the public. Mr. BICKwIT. The test that you have given the subcommittee for what would render these ads nondeductible is a broad one. I suspect some will argue upon hearing it, that it would disqualify for deducti- bility virtually any statement by an advertiser on any matter since virtually any matter could become the subject of legislation. How would you respond to that? PAGENO="0059" 93 Mr. FANT. I think you are referring to my interpretation of the words, "legislative matter," which I interpreted as being broader than "legislation." I agree that that is a broad interpretation. I feel, how- ever, that based on the policies which are involved, a broad interpreta- tion is called for. I also feel that as our society advances and progresses more matters have become legislative matters than were previously. Some things which Federal and the State legislative bodies consider, would be shocking to 19th-century legislatures. It's possible that in the 21st century there would be even more ques- tions related to our national life that have considered legislative mat- ters. But I feel that that is the way it should be, that if a matter be- comes a legislative matter, advertisements related to that become nondeductible. I also feel that it is perfectly possible for business to publish good will advertisements on legislative matters provided they don't amount to an attempt to influence the general public. Businesses sometime say that an ad promotes their good will because it keeps their name before the public and it wins the sympathy of the general public. I feel that business can publish ads which have that purpose which present both sides on an issue. In fact, in my opinion, that the goal of increasing business popularity with the public would be advanced by an ad that fairly presents both sides of a legislative matter and is signed by a business. Such an ad would relate to a legislative matter but could be fully deductible. It's the advertisements which are exclusively on one side of the legislative matters in which there is a conflict that I feel are nondeductible. Mr. BIOKWIT. Are you aware of any private rulings by the IRS which would either support or contradict the test that you have offered to the subcommittee? Mr. FA~rT. Well, of course, the private rulings issued by the IRS are confidential at the present time. I might add that such secrecy is subject to litigation at the present time as to whether the rulings granted taxpayers should be made available to the general public. I would also point out that as I analyze the question, and not necessarily as the IRS would, the questions that we are dealing with are essentially questions of fact. And as a matter of general policy, the IRS does not give rulings in which they determine to be simply questions of fact. Most of their rulings are designed to answer questions of law or questions of the application of law to facts. This does not mean that there are no private rulings on the subject, it simply means I am not aware of any. Mr. BIOKWIT. How do you feel about not being able to have access to those rulings? Mr. FANT. Well, as I say, it is subject to litigation at the present time and I personally hope that the court decides that these matters will be available to the public. I cannot say that under the laws which control the litigation, that would be the correct result, because I hon- estly have not made a study of the laws involved. Mr. BI0KwIT. The staff has attempted rather hurriedly to review the leading cases on the provision of the code that has been discussed today. While it is difficult for us to determine from those cases exactly PAGENO="0060" 94 what the judge's tests were for nondeductibility, the only case that we can find where the test would apply to be inconsistent with your own is a memorandum opinion of the tax court in Addressograph- Multigraph Corp., cited for the record as 14 P-H, tax court memo- randum paragraph 45,058, 1945. Do you distinguish that case, or do you simply disagree with its holding? Mr. FANT. Well, first of all, given the facts that are set forth in the opinion in Addressograph-Multigraph, I can't be absolutely certain whether applying the tests I have outlined, that different results would be reached or not. The opinion does not set forth the body of the ads, but only describes them in a very summary way. I believe, however, that I would reach a different result. Now, the importance of the Addressograph case to my analysis is greatly diminished by the fact that the tax court judge in that opinion relied very heavily upon an earlier case, the Los A'ngele$ c~ Salt Lake Railroad case. In fact, the judge relied almost exclusively on the earlier opinion and did not analyze the issues or discuss the factors which should be applied. The Los A'nqeles d, Salt Lake Railroad case was decided in 1929, and permitted deductions for expenditures for grassroots lobbying on the ground that the regulations then in force only applied to unethi- cal or unfair lobbying, and that the advertisements published by the Los Angeles & Salt Lake City Railroad Co. were not unethical or unfair. That view has been thoroughly discredited by later court cases, by the Supreme Court in Uamrnara~o and by Congress in the enactment of section 162. Since the court in Addressograph relied upon the ear- lier case, it's my feeling that Addressograph itself must be viewed as somewhat discredited. Mr. BlcKwrr. Do you know of any other cases or published rulings which have adopted a test inconsistent with the one that you have presented to the subcommittee? Mr. FANT. Well, there are no cases or published rulings of which I am aware which explicitly adopt tests that are inconsistent or con- trary to what I have set out today. I feel that what I have set out today is generally supported* by the case law. I have to sa.y, however, that courts in many instances express their opinion in a conclusionar fashion. It is quite possible that factors other than those I have discussed were applied or that some of the factors I discussed were not applied, so that I can't say with exact certainty, but I am not aware of any case which would allow a deduc- tion which, under the factors as I have outlined them, would be dis- allowed. Mr. BICRwIT. Have you read the responses of the companies to Senator Hart's letter asking them to characterize their ads? Mr. FANT. No, I have not. Mr. Bicjcwrr. Well, even if not, if you heard the preceding witness I am sure you are aware that generally speaking their characteriza- tions of those ads differ sharply from your own. If ultimately the subcommittee comes to accept your analysis rather than theirs, what would you suggest the subcommittee do about it? PAGENO="0061" 95 Mr. FANT. Well, first of all, I would like to reiterate what the pre- vious witness said, that I don't think such a determination should be made without hearing the other side, and without hearing the analy- sis which might support the characterizations of the ads by those who sponsored the ads. 1 also have to say that my analysis was based solely on the four corners of the ad, and that in some instances there might be facts and circumstances of which I am aware that could lead to a contrary result, even under the factors I have presented. For example, in the regulations that relate to lobbying by private foundations, there is a provision which says that private foundations can engage in publicity campaigns so long as both sides are fully pre- senteci so that the reader of the publicity can make up his own mind. There is a provision that says that this can be applied to a whole series of ads. For example-under this analysis there can be one ad which says water pollution is very good and sets forth the economic reasons why a certain amount of pollution is necessary and which if I looked at it and applied my factors, I might well determine was nondeductible. However, if the next week in the same publication there was another ad or the sponsor of the first ad that said that water pollution was bad, I might reach a different result. I give that as a fairly farfetched example, but I think that there are other facts and circumstances which have to be considered. If the subcommittee does arrive at the judgment that the sponsors of these ads have claimed deductions for expenditures which, in the subcommittee's judgment, are nondeductible, I believe that the first purpose served by these hearings is to bring this to the attention of the sponsors of the ads. Ours is a system of self-assessment and, hopefully, if my analysis and that of the previous witness and the other facts presented are persuasive, the sponsors of the ads will not claim deductions for these of future ads or conceivably might, if they were persuaded, file amended tax returns. I disagree somewhat with the previous witness on the role of citizen participation in IRS proceedings. I do know, however, that the IRS values any information which is helpful to them in making determinations in tax cases, and I would suggest that the record be made available to the IRS for whatever uses they felt were appropriate. Mr. BicKwrr. I have one final question. In your statement you say that denial of deductions for grassroots lobbying under section 120 (e) (2) of a marginal impact at best, that it will have a marginal im- pact on the problem of imbalance. Mr. FANT. That's correct. Mr. BloKwrr. Personally I tend to agree with that. Does that lead you to the conclusion that if Congress is determined to remedy that imbalance they will have to take on the other side of the equation, to give more favorable tax treatment to those who are organized not for profi~. I don't want to put words into your mouth, but is that a conclusion that you would support? PAGENO="0062" 96 Mr. FANT. Well, as I pointed out earlier, the problem is one of im- balance, and section 162(e) (2) does not correct the imbalance. The im- balance still exists and will continue to exist. I believe you are suggesting that a possible way to further the im- balance would be to provide more favorable tax treatment to either private citizens or to organizations which represent the interests of private citizens. I would first point out that the most-the greatest imbalance that I find is in the section of direct lobbying, where as a result of the amendments made in the Revenue Act of 1962 businesses can deduct all of their expenses for making presentations to legislative bodies, whereas charitable organizations, educational organizations, cannot do so unless they are specifically invited to do so by legislative bodies or members of committees. That is the area in which I feel there is the-there is present im- balance. `On the subject of the tax treatment of grassroots lobbying, there shouldn't be any imbalance. Such expenses are not generally deductible by businesses, private individuals, charities, labor unions, nor business leagues. So that I feel in the first instance that if the law were followed, there would be something approaching tax balance on the subject of grassroots lobbying. Now, if your suggestion is that possibly charitable organizations or action organizations of citizens be allowed to engage in grassroots lobby1ng and contributions be deductible, would you allow business a deduction also; to allow charities to engage in grassroots lobbying, but to continue to deny deductions to business would go further to correct the imbalance. But I feel that more immediate and probably more prac- tical result would be to bring equilibrium to the direct lobbying- Mr. BICKWIT. I don't think I made clear what I mean by imbalance. What I am talking about is the balance in the presentation that Con- gress is likely to perceive from the various interests involved. WThat I read you to be saying, is that even if you enforce the law so that there is balanced treatment of deductions, there will not be bal- ance with respect to the kind of viewpoints that are made available to the Congress. It is that statement with which I agree and it leads me personally to the conclusion that perhaps other remedial measures from a stat- utory standpoint ought to be considered in light of the conclusion that the pure endorsement of the law as it exists will not remedy the problem as I see it. Mr. FANT. Well, that it will not remedy the broad problem, because business, when it is vitally affected, can tap its enormous resources to run all the ads it wants even though such ads are nondeductible. The fact that it will cost business more because the ads are nondeductible will not, in my opinion, deter business from engaging in grassroots lobbying in areas where their interests are at stake. Mr. BIORwIT. And it probably wouldn't deter them from engaging in direct lobbying even if that were ma'de nondeductible ~ Mr. FANT. I believe that is true also. But w~hat I was saying is that the ability of the tax law to further correct the imbalance, I feel, is somewhat limited. I understood you PAGENO="0063" 97 to be suggesting that charities or public interest groups be permitted deductions for grassroots lobbying. This suggestion would reduce the imbalance in the ability to influence the general public with respect to legislative matters, `but would put the tax law itself into imbalance. Mr. BICKWIT. Exactly. That is what I am suggesting, that you may need imbalance within the tax code in order to promote a semblance of balance. Mr. FANT. I think that that would further reduce the imbalance. Mr. BICKWIT. Thank you very much, Mr. Fant. Thank you, Mr. Chairman. Senator HART. Mr. Fant, again, thank you very much for a very helpful explanation. We like to think we don't operate in a vacuum and I am sure that `both the IRS and the FPC should be made aware of some of the corn- ment that has been made today. But it is my intention that we invite those advertisers whose ma- terials have `been identified to make an explanation as to their judg- ment as to how it should have been treated and any suggestions they may have with respect to the law. Pending the announcement of that date, the subcommittee is ad- j ourned. [Whereupon, at 12:55 p.m., the subeoimnittee hearing was ad- journed, subject to the call of the Chair.] PAGENO="0064" PAGENO="0065" ENERGY AND ENVIRONMENTAL OBJECTIVES THURSDAY, JULY 18, 1974 TJ.S. SENATE, COMMITTEE ON COMMERCE, SUBCOMMITrEE ON THE ENVIRONMENT, Wa$hington, D.C. The subcommittee met at 10:47 a.m., in room ~5110, of the Dirksen Senate Office Building; Hon. Philip A. Hart (chairman of the sub- committee) presiding. Senator HART. The committee will be in order. I apologize to every- one who was inconvenienced by this delay. It is simply that an unantic- ipated meeting of the Democratic Conference of Senators was called for this morning, and is still going on. I am sure this is not the only place that has suffered. We resume hearings today on the energy and environmental advertising. At our last hearings a number of allegations were made with respect to the tax and Power Commission treatment of these ads. The sub- committee invited those against whom the criticisms had been di- rected to respond. Although most declined, we are grateful to those who have come today to present their side of what is a complicated story. With an expression of thanks, let me welcome as our first witness Mr. Herb Schmertz, vice president of public affairs of Mobil. STATEMENT OP HERB SCHMERTZ, VICE PRESIDENT, PUBLIC AP- PAIRS, MOBIL OIL CO.; ACCOMPANIED BY DAVID A. LINDSAY Mr. SCHMERTZ. Thank you, Senator Hart. My name is Herbert Schmertz. I am vice president for public affairs with Mobil Oil Corp., and I have been extensively involved with my company's efforts to explain its viewpoint on energy prob- lems to the public through advertising in the press, on radio, and on television. I am accompanied by David Lindsay, our outside tax counsel from the law firm of Davis, Polk & Wardwell. First, I would like to thank the committee, on behalf of Mobil and myself, for the opportunity to appear before you today. As a com- pany, Mobil takes pride in its communications program, and par- ticularly in the stand for freedom of speech we have taken in the belief that a free marketplace of ideas is essential if the American public is to make informed decisions on major issues. I am therefore grateful for the chance to explain some aspects of this program to you. I would like to address myself first to some specific tax questions in which you have expressed an interest. (99) 42-367-75-------5 PAGENO="0066" 100 For tax purposes, Mobil divides its institutional advertising into four groups, relying on concepts of public advertising contained in Treasury Regulation 1.162-20. As you are aware, the regulation states that "expenditures for institutional or `goodwill' advertising" are gen- erally deductible. The regulation provides more specifically that: A deduction will ordinarily be allowed for the cost of advertising which keeps the taxpayer's name before the public in connection with encouraging contribu- tions to such organizations as the Red Cross, the purchase of U.S. Savings Bends, or participation in similar causes. In addition, the regulation states that advertising expenditures are tax deductible if the advertising "presents views on economic, financial, social or other subjects of a general nature providing they do not in- clude expenditures for lobbying, for promotion or defeat of legislation, or for related propaganda. Based on these considerations, our ads are grouped as follows: Group I consists of ads of the so-called "Red Cross" variety. Some of them have promoted Masterpiece Theatre, a series of dramas and other programs underwritten by Mobil and shown over pithlic tele- vision. We have also taken space to urge support for New York Public Library, for programs of concerns, opera, and theater in New York City parks, and for the activities of the Interracial Council for Busi- ness Opportunity, to name only a few. Group II deals with fuel conservation and safe driving-noncon- troversial topics in which we have some expertise and which we feel it is in the public interest to discuss. Ads in this group have dealt with ways of conserving gasoline, driving safely, conserving fuel in the home, and lighting in general. Group Ill covers a broad socio-economic field dealing with such subjects as technology in general, conservation efforts, and similar broad topics. Group IV covers advertisements which relate in part to regulatory policies on antipollution control, or contain general information on the energy shortage, or discuss other topics with sufilcient legislative potential to cast doubt on their deductibility. Our policy, simply stated, is to regard ads in the first three cate- gories, which conform to the wording and intent of the regulation, as deductible. We do not take deductions, however, for ads in group IV. Moreover, we submit all our ads to outside counsel for their opinion on the ads' tax deductibility, and counsel has instructions to adopt a conservative standard in determining deductibility under the statutes,. regulations, and case law on the subject. This decision to take a conservative view of what constitutes tax deductibility has obviously cost us money. For example, our news- paper advertising expenditures in 1973 were as follows: Product and service ads $326,000, goodwill advertising $799,000, nondeductible advertising $411,000. In other words, in 1973, out of a total newspaper advertising budget of $1.5 million, we claimed no tax deduction for a quarter of it. Also, we decided in mid-1973 tO discontinue gasoline advertising and redirect our efforts to broad public issues and public information programs. We would therefore expect that our percentage of nondeductible ad- vertising would increase. Let me explain why we have resorted to institutional advertising on such a scale. PAGENO="0067" 101 In brief, we believe that we have something important to say, and that we can only get our message across through paid advertising. We came to that decision after it became clear that other more traditional tools were not succeeding. Try to rebut misinformed reporting with. a letter to the editor, and you will usually find it appears-if at all- many weeks after the original misstatement. Try to get your view across in a news release, and it may never see the light of day. Our major point, however, is not that the press is biased but rather that the complexity of the energy issue results in inadequate coverage of it in the news columns. I would like to reiterate, Senator, we are not saymg that the press is biased. Hence, the decision to advertise, and the corollary decision-that it would be pointless and self-defeating for us to engage in technical dis- cussions of tax deductibility, even if a legitimate case could sometimes be made. As a matter of policy, we prefer to battle on what we con- sider to be the real issue here-a company's right to be heard in the Nation's marketplace of ideas. Let me backtrack a little to explain. As you may know, Mobil began a regular program of advertising in the New York Times in January 1972. Our ads, appearing every Thursday, are on the page opposite the editorial page-called the op-ed page. Prior to 1972, we had published `an ad in this space in October 1970 in favor of better mass transpor- tation-a highly unusual position, I might say, for an oil company at that time-and had also taken the space to promote Masterpiece Thea- ter, TV's Sesame Street and Electric Co., which we supported, and other public service organizations. But by 1972 we had become suffi- ciently concerned about the future of U.S. energy supplies to initiate a full-fledged weekly campaign that would be highly visible. In the light of the present energy situation, I think you will agree that our concern was legitimate. We emphasized the need for in- creased oil and natural gas production to meet escalating demand. At the same time, we urged restraint in the use of oil products to conserve existing supplies. We drew attention to the roadblocks in the way of establishing a coherent national energy policy. We pointed out that, without such a policy, we as a Nation faced unacceptable dependence on foreign oil. Nevertheless, for the vast majority, the energy crisis, if it existed at all, was no more than a small cloud on the horizon at that time. Then, of course, the crisis hit home last fall with the virtual quadrupling of oil prices by the major producing countries outside the United States, and the decision by some Arab countries to embargo the export of crude oil to this country. For the major oil companies, the Arab embargo produced a twofold crisis. First, of course, there was a crisis of supply, which the oil corn- panies surmounted to a large extent by a complex restructuring of logistics patterns on a worldwide scale. Second-and more germane to our present discussion-was a crisis of credibility. In simple terms, the energy crisis which erupted in late 1973 caught Government, the media, and the public totally unprepared. The grow- ing gap between U.S. energy production and consumption, and the prospect of increased dependence on insecure foreign supplies which might be interdicted at any moment, simply had not been taken seri- PAGENO="0068" 102 ousiy. The result was that, when the crisis came and the lines began to form at the service station, the public looked around for a scapegoat. The oil industry was a very visible and very convenient target. Most people would agree that, during this crisis, the broadcast media deluged their viewers with stories on energy. But how many people could tell you what the answers were to some basic questions that were prominently debated in the media at that time? For example: Were tankers really waiting offshore for higher prices before unloading their cargoes? Was the energy crisis contrived by the oil companies? MThy are oil company profits so high? Why is the United States so reliant on foreign oil? What role did Congress play in creating the oil and gas shortage? Despite the hours of broadcast time devoted to energy crisis, most people don't have a clear conception of why or whether the energy crisis existed. What they heard or saw didn't help them resolve the issue. It is my contention that many of the answers or explanations sim- ply didn't make it through the comnTnmications networks. In fact, the complexity, scope, and suddenness of the energy crisis combined to overwhelm the media. Television was unprepared to cope with the tre- mendous volume of information. News on energy broke so fast that nearly each day brought a completely new story on the subject. The problem of keeping up with the news was compounded by the fact that so few reporters, outside the trade and business press, knew any- thing about energy. Specialists were almost nonexistent. The result was a breakdown in communications just when commu- nication was critical. In short, the circuits couldn't handle the load. The basic cause of this failure can be found in the structural limits of television network news. Typically, a television news program has to handle 10-12 stories in the space of half an hour, and for that rea- son alone was unable to cover the energy crisis adequately. Again, the networks apparently employ no energy experts to advise on the content of news stories. Finally, television news is at least to some extent entertainment, and broadcast journalists~ are forced to worry about their ratings in competition with other network journalists. Against this background, television news failed in its coverage of such recent energy stories as the tanker rumor, the Jackson and Church hearings, the 1973 oil profits reports, why we are so dependent on foreign oil, ~nd the role of Congress. These stories, so important in creating and directing public opinion about energy, in our opinion, were inaccurately and inadequately reported. A medium which stresses topical entertainment and emotion in its news and public affairs pro- graming cannot simultaneously provide in-depth coverage of such complicated and controversial national issues. Our conclusion is that network news has overdramatized and over- simplified the energy story. The structure of broadcast news is inhibit- ing rather than promoting full and robust debate on public issues such as energy. Now it is our belief that the American public deserves more infor- mation than this structure allows. We choose to believe that, given the facts, the public will weigh them and make rational decisions. But our own efforts to give the public the facts as we see them, PAGENO="0069" 103 through television advertising, have run into serious problems. For, while the press has been willing to sell us space, and has hardly ever disagreed with us over the substance or placement of an ad, it soon became apparent that the networks were not ~only determined to be the arbiter of what we could and could not say, but that they were going to exercise their power in any extremely arbitrary way. Specifically, we were told that network policy is not to sell time for the discussion of "controversial issues of public importance." One radio station-WTOP here in Washington-said the energy crisis was a controversial issue and therefore they could accept no commer- cials dealing with the subject. When it became clear to us that the networks might be worried that they might have to provide free time under the law for a rebuttal of Mobil's views, we offered to pay for any rebuttal time the networks were required to provide, as well as for our own message, with the networks having total control over whether a rebuttal is required under the fairness doctrine and the, persons or groups doing the rebuttal. This offer, so far as I know, was unprecedented in the annals of commercial television. But the networks have continued to insist as a general principle that energy issues can best be covered in the news programs, and that journalists should decide what should appear. The final irony, of course, is that the oil industry-not television with its three major networks-is accused of being an oligopoly. One example will show you what we are up against. In an ad we prepared to run on television, we plan to have the camera focus throughout on a beach and ocean waves while the announcer says: According to the U.S. Geological Survey, there may be 60 billion barrels of oil or more beneath our continental shelves. Some people say we should be drilling for that oil and gas. Others say we shouldn't because of the possible environmental risks. We'd like to know what you think. Write Mobil Poll, Room 647, 150 East 42nd Street, N.Y. 1001~7. We'd like to hear from you. NBC accepted this ad without change. CBS turned it down in a letter which in part read: We regret that the subject matter of this commercial * * deals with a con- troversial issue of public importance and does not fall within our "goods and services" limitation for commercial acceptance. ABC also turned down the ad in a letter which gave no explanation, but merely said: This will advise that we have reviewed the above-captioned commercial and are unable to grant an approval for use over our facilities. We decided that we could not let this capricious behavior go un- challenged. We there-fore took out a newspaper ad which gives the proposed visuals and text for our TV spot, together with the three networks' replies. So far we have received over 2,000 replies to this newspaper ad. While we have not completed a total analysis, a quick spot check indi- cates that the respondents overwhelmingly favor our right to express our viewpoint on the air. We feel these letters are the clearest indication yet that the public wants the facts, and support our basic tenet that we as corporate citi- zens with a spcial expertise in energy matters should be given the PAGENO="0070" 104 opportunity to express our views in the marketplace of ideas. This accords with our belief that, in a democracy, one of two things will happen if we are allowed to exercise our rights. If our views are correct, we will have made a positive contribution to the national debate on energy policy and related issues, and we will have helped the Nation establish the coherent set of priorities and principles it needs in the energy field. If we are wrong, our ideas will be shot down, and we will lose both money and reputation. We are prepared to take our chances. Indeed, the issue here is one of even greater importance than na- tional energy policy, crucial though that may be. What is at stake here is the principle that debate on national issues be allowed to proceed unshackled by artificial constraints, a principle embodied in the first amendment to the Constitution of the United States. It is because of our company's commitment to free speech-both for ourselves and our opponents-that we have filed a response with the FTC to the petition submitted by six Members of Congress last Janu- ary, which would have extended advertising substantiation regulations beyond the realm of product advertising to the fields of energy and environmental ideas. As we stated in a memorandum ified by our attorneys with the FTC, numerous Supreme Court decisions show that the petition consti- tutes a serious incursion on first amendment rights of free speech. These precedents show that in the interest of an unencumbered market- place of ideas, the FTC's regulatory authority should be limited to product advertising and should not extend to corporate statements under public debate. In fact, we said, the scope of the Congressmen's petition was so broad: That many forms of speech which are far removed from product solicitation might possibly be covered. For every potential untruthful claim which will be revealed or discouraged by such a rule, the expression of untold numbers of honestly held beliefs will be discouraged. Although Mobil can substantiate all of its advertisements, the com- pany pointed out that the petition is further defective since only oil companies but not their critics would be forced to meet substantiation requirements. I think I have said enough to shed some light both on the imme- diate question of tax deductibility for certain types of advertising, and on the underlying policy issues involved. To summarize our position: We take an extremely conservative view of what constitutes tax deductibility for paid advertising. We take this view in the belief that fundamental issues of national concern are at stake and we feel we would do neither ourselves nor the country a service by losing sight of them. We need a free marketplace of ideas in which those with something to say can say it-untrammeled by redtape, cen- sorship, and petty regulation. And we desperately need the coherent national energy policy which can only come when the public has the facts, and can make a balanced judgment of the issues on their merits. [The attachment follows:] PAGENO="0071" 105 Why do two networks refuse to run th~s commercial? As you can see from the storyboard repro- duced above, we want to ask the public how it teelsabout offshore drilling. Butthe policies ottwo national television net- works prevent us horn asking this question. This isdange'ous, itseemstoun.Anyrestraint onfreediscussion isdangerous. Anypolicythat restrictsthetlowofinforrnationor ideas is poten- tially harmful. The networks say that the public's need for information is bent served in news programs prepared by broadcastjournulists. Behind the networks' rejection of ideg adver- tising may be the fear that demands for equal timewillbernadc.Wehavea reasonableanswer to that.We offer to payfor equal time, when the request in legitimate. Wethink more discussion, not less, is needed of vital issues such as the issue of America's energy needs. We're willing to buy the time to say what we should be saying. We're milling to buy time so you can hear opposing views. But two big networks aren't willing to make time available, in this case. You know the principle at stake here, You've seen it in writing, more than once: "Congress shall make no law,,, abridging the freedom of speech' You've seen it in the First Amendment to the Constitution of the United States, So We'd liketo knowwhal you think abouteither of these issues. Write Room 647,150 East42nd Street, New York, N,Y, * 10017, Mobil This ad will appear in the New York Times on Monday, June 17, 1971~. Mr. SCHMERTZ. Thank you very much. Senator HART. Thank you very much for your statement that goes far behind the focus of what we thought we were treating when we had that first day of hearing. I confess I have been on the Com- munications Subcommittee of this Commerce Committee for several years. CBS: `We regretthatthe subfect mattorotthts commeeclal...deals with a contuoverstol lssueol puhec lmpontasco and does nut faflwtthls our `goods and services' tInkle- Iaeceetanca ABC: "ThIs will advIse that we have reviewed the above-csptlcned commercial and are ramble to grant an appnvvol for eva overeurfacOthest NBC: "Aptsrovedessubmllted:' PAGENO="0072" 106 Mr. SCHMERTZ. I am aware of that. Senator HART. Arid I have to go back to the first chapter every time this question of what is and what is not required under the f air- ness rule is raised. . I get lost every time the issue is raised: One of the concerns, of course, is that on important public questions there are usually at least two bodies of opinion. One may happen to have a big wad of money, and the other which may or may not have the better idea, may have little or no money. Mr. SCHMERTZ. That's right. Senator HART. What suggestions do you have? Now Mobil picks up the bill for the poor guys; we can't very well legislate that, can we?. Mr. Sciil\rERTz. Senator, it seems to me that when the Supreme Court talked about this in the BEM case and the CBS case and the Commissioners tidked about it, it seems to me that the networks ought to start to try some experimentation to try to develop a structure that increases the spectrum of views and opinion beyond just those of the journalists. Now I don't know what the ultimate right answer is, but at least the first step ought to be some sort of a national debate on the problem of access. not only problems of oil company access, *but problems of so-called public interest groups access and all the rest. Out of that debate, and the networks should really take the lead in this, it seems to me, ought to be some attempt at experimentation ~o develop a structure. Let's say for the sake of discussion that they did set aside 10 percent of their time or something of that sort. And some might pay, some might have free time within that structure. Let's say that the network news were expanded to a full hour which the networks apparently have wanted, and the affiliates have resisted and if in that full hour some portion were given over to an access situation.~ I don't know what the right answer is, Senator. I am not in the network news and television business. I do know that I have not seen any showing by the networks of a desire to experiment, discuss, and try to develop a structure. I think really the burden is on them to come forth. We have made what we think is a contribution, hopefully, to stimulate that with our offer to pay for the equal time. That was rejected. We had hoped that perhaps that might stimulate some discussion and debate. Senator HART. A few years ago I remember a group of us here in the Senate sought to purchase television time to present what was then a minority view about Vietnam. And we couldn't buy it. Mr. SOHMERTZ. That is the specific case that is relied upon by the networks today; the Businessmen Against the War in Vietnam case and the Democratic National Committee case are the two cases that came to the Supreme Court a little over a year ago at the same time. And that is the law of the land today. You prevailed up through the circuit court. Senator HART. Yes. Well, having not solved the problem as it relates to television, how do we solve it as it related to newspapers? Does the fellow who can buy the full page get his idea across? What do we do about the opposing point of vh~w that can't buy the page? PAGENO="0073" 107 Mr. SOHMERTZ. I think newspapers are a very different situation for two fundamental reasons, at least, Senator. First of all, I don't have to get anybody's permission if I want to start a newspaper. I have economic problems, obviously, but if I have a mimeograph machine I can start a newspaper and really the growth of the underground press is a demonstration of the vitality in the area. So I don't have to get permission in that sense. Second, newspapers, if you take the whole ball of wax of news- papers, I think you are getting a pretty good diversity of opinion in the print press. I think the print press does a pretty good job. Now from our standpoint, we have felt that at least during a cer- tain period we were not getting enough information in the unpaid part of newspapers and that is why we felt obligated to try to redress that balance through paid advertising. But by and large, I don't think there is the major problem of access and adequacy in print that you have in television. Television news to a very large extent is a headline service. And as we all know headlines don't tell the story. Senator HART. Yes, as you put it, the structure of broadcast news inhibits full and robust debate on public issues. Mr. SOHMERTZ. I think that's correct. And when poles show that 60 or 70 percent of the people say that television news is their primary source of information, that is a distressing situation. We now have the most powerful communications medium ever developed, and it is not acting as a flow of information to the people. Senator HART. To react to one specific on the narrower subject of tax treatment of institutional advertising, you tell us that your deci- sion with respect to the category four type of advertising-I take ~t it was broader than that. You decided to submit your proposed ads to outside tax counsel? Mr. Sci-IMERTz. Yes. Senator HART. That seems to me a costly, though very responsible procedure. Mr. SCHMERTZ. I would just recommend one thing, sir. We don't submit them before we run them. We submit them after, so it is not proposed ads. Senator HART. But before, you determine how you shall handle them financially? Mr. ScIi~n~RTz. Yes, sir. Mr. BIcuwIT. Just simply what led you to take that procedure? Mr. SCHMERTZ. We came to the conclusion that we did not want the issue of deductibility or nondeductibility to really cloud the bigger issue of whether we could communicate adequately or not. There was a much bigger issue involved here and that was the adequacy of information and we just didn't want to get involved in what was a narrower issue of deductibility and nondeductibility. Mr. BIcKWIT. Thank you, Mr. Chairman. Senator HART. I am sure you sense that the feeling with respect to major oil companies is so sharp that many people have reacted harshly to what you describe as a necessary educational program. Mr. SCHMERTZ. We are well aware of that, Senator, yes. Senator HM~T. In that sense, you are sort of damned if ~OR (10 and dannecl if you don't. PAGENO="0074" 108 Mr. SOHMERTZ. That is true. But when we looked at what we thought our obligations were, we decided we would incur that with willingness. Senator HART. I am reminded of not that particular ad, but some- thing I heard in my own living room, my own family. A very attrac- tive shot was run, and the message was missed at least by one part of the audience in our house, who had a violent reaction to the ad. They are spending more money than- Mr. SCHMERTZ. That is a legitimate issue of debate, no question about it. We are prepared to face that. And it is a problem. Senator HART. Well, as you leave, let me express to you and Mobil our appreciation of the fashion in which you have handled your advertising. Mr. Lindsay, did you have anything you would like to add? Mr. LINDSAY. Nothing to add, Senator. Senator HART. Our next witness is vice president and general coun- sel of the American Electric Power Service Corp., Mr. Joseph Dowd. Mr. Dowd~ STATEMENT OP FOSEPH DOWD, VICE PRESIDENT AND GENERAL COUNSEL, AMERICAN ELECTRIC POWER SERVICE CORP.; AC- COMPANIED BY A. W. D. GRONNINGSATER, TAX COUNSEL OP THE SERVICE CORP. Mr. DOWD. Good morning, Mr. Chairman. Mr. Chairman, my name is A. Joseph Dowd. I am vice president and general counsel of American Electric Power Service Corp. The Service Corp. provides managerial, professional and technical services to the operating companies of the AEP system. With me today to assist in answering any questions you may have is Mr. A. W. D. Gronningsater, tax counsel of the American Electric Power Service Corp. The American Electric Power system presently has a generating capability of almost 14.5 million kilowatts and has, or soon will have, about 8.? million kilowatts of additional generating capacity under construction. We serve in parts of seven States. Our service area ranges from the Blue Ridge Mountains of southwestern Virginia to the shores of Lake Michigan, and while we are a large system, we do not serve large urban areas-rather we serve primarily a large number of small communities and rural areas. More than 5,700,000 people depend upon us for their electricity supply-a responsibility that we take very seriously. We are located to a large extent atop the eastern coalfields. We are, therefore, a coal-based utility with 93 percent of our generating ca- pacity fired by coal. We have been invited to appear here today to respond to testimony before this subcommittee which was presented on May 6 by Media Access Project. We understand that this hearing also involves consideration of S. 2532, which is described in its caption as a bill "to promote conserva- tion, reduce wastage, and attain greater efficiency in the generation of electrical energy." While we do not propose to comment on the specifics of this bill, I would like to make clea.r at the outset that the AEP system supports PAGENO="0075" 109 sensible conservation efforts and has always been opposed and has always done its best to eliminate wastage and inefficient utilization of electric energy. In fact, one of the ads in our current advertising program is devoted entirely to promoting the concept of energy conservation. Beyond this, we have distributed booklets and customer bill inserts and radio and TV messages urging our customers not to waste electric power. Insofar as "efficiency in the generfttion of electric energy" is con- cerned, the AEP system ranks first in the Nation, that is, we are able to squeeze more kilowatt hours from a given amount of fuel than any other system. By way of background to our ad program, I would like to go on in this vein somewhat. While sensible conservation efforts are desirable, we should not be deluded into the belief that such efforts alone can solve our Nation's energy problems. Total energy has been growing in recent years at a rate of just under 5 percent, and electric power at `a rate of 71/2 percent. We must be extremely careful in putting the brakes on, for any attempt to go well beyond eliminating waste in order to curtail energy growth sharply could precipitate a worsening of economic conditions, including widespread unemployment. Barring mandatory conservation of electric power-either by legis- lation or by the insufficiency of generating capacity or fuel-we do not foresee any substantial reduction in the historical growth of electric power `during the next several years. `The reasons for this are as follows: First, we believe voluntary conservation is at its height in the first flush of enthusiasm and tends to decrease as it results in any real inconvenience or discomfort. This is merely a reflection of human nature. Moreover, the elimination of waste is, in large part, a one-shot proposition. For example, you can replace a 100-watt bulb with a 60-watt bulb only once. Therefore, the effect of voluntary conservation on growth rates after the first year will, we believe, be much less. Second, putting population growth to one side, the age composition of our existing population alone must inevitably result in new family formations and increased usage of electricity. Third, there will be demands for an ever-increasing standard of living-particularly by the lower income groups who will insist quite properly upon improving their economic status. Fourth, there will be new uses for electric power-not the least of which are for environmental controls. A recent survey indicated that such use now represents 7 percent to 10 percent of the electricity de- mand of large industry. Fifth, in many cases, electric power is being required to replace other sources of energy which are in short supply, that is, gas and oil. We can already see this in residential electric space heating which is now growing even faster than in prior years when it was being en- couraged by vigorous promotion. In fact, FEA Administrator Sawhill in a recent speech stated that he expects, and I quote, ". . . the electric power industry to provide PAGENO="0076" 110 electrical energy in increasing proportions for end-use activities, such as space heating and transportation." All forecasts for long-range energy requirements suggest that elec- tric power will have a growing responsibility in supplying the energy needs of the future. Electric power should, and will, replace gas and oil wherever prac- ticable-to conserve these fuels for uses for which there are no sub- stitutes. Indeed, as I have indicated, this process has already begun in the field of space heating. The solution-at least for the short term-and midterm-is greatly to increase the production and use of coal to generate electric power. And this is the basic theme of AEP's current advertising program which was referred to by Mr. Shulman of Media Access in his May 6 testimony. As an electric public utility, we have a legal and a moral respon- sibility to anticipate the future demand of our customers and to have available for them at the moment of need an adequate and reliable supply of electric energy. In order to satisfy this responsibility, we must forecast future demand as accurately as we know how, plan and construct the neces- sarv physical facilities in time to meet our customers' requirements, and insure the availability of the necessary fuel to operate in those facilities. Fuel supply is our most immediate and our most critical problem- currently and for at least the next 10 to 15 years. Under `existing technology, we can generate significant amounts of commercial electric power ouly by the use of falling water at hydro- electric plants or by the use of gas, oil, nuclear fuel, or coal. Hydroelectric sites are limited and can make only a relatively minor contribution to our future power supply. As we all know, gas and oil are in short supply. There is even some que.stion as to the extent of our nuclear fuel reserves-particularly our domestic reserves-and there is a growing question about the adequacy of our nuclear fuel refining capacity. But, in any event, the delays associated with the design, equip- ment, construction, and licensing of nuclear plants make it impos- sible to count on bringing in a nuclear plant in much less than 8 to 10 years. Nuclear power is important and can provide some help for the short term and midterm. But at best, such help will represent only a minor part of what will be required. And then there is coal. Coal is the key element in the solution of our short term and mid- term fuel problem. Our domestic reserves represent a greater Btu con- tent than all of the oil in the Middle East, and can provide a fuel sup- ply adequate to generate our electric power requirements for at least several hundred years. In this context it is indeed anomalous that coal, which constitutes 93 percent of our fOssil fuel resources, provides only 17 percent of our gross energy. Obviously, we must greatly increase the production and use of coal to generate electric power. PAGENO="0077" 111 This will not only solve most of the problem for electric power supply. It will also make a major contribution to easing the demand for gas and oil by making them more available for those uses for which there are no substitutes. Under these circumstances, one would have thought that the Gov- ernment would have adopted policies to encourage the greater pro- duction and use of coal. But the hard fact is that Govermnent policies have, instead, inter- posed major obstacles and, at the present time, are, in fact, discourag- ing the production and use of coal. The use of coal is being discouraged primarily by those who are not satisfied with compliance with ambient air quality standards prescribed to protect health, but who insist that there must be com- pliance, as well, with rigid emission limitations, under rigid time- tables, which at least in the case of sulfur dioxide emissions, are wholly unrealistic and, indeed, unattainable. These SO2 limitations will by mid-1975 have the effect of prohibit- ing the burning of most of our eastern coal-about 225 million tons, or more than one-third of our Nation's current requirements. And in connection with the very large amount of iow sulfur coal in the west owned by the Federal Governrnent-which could be ob- tained most quickly and which would be most useful in dealing with the SO2 problem-we have had the equivalent of a domestic embargo for a year or more with the cold comfort of periodic, reports that the matter is under study and that perhaps some decisions will be made by the end of 1974. The basic purpose-the thrust-of our advertising program is to inform the public as to these facts, and to hopefully bring about an increase in the production and the available supply of coal so that we can meet these electric power needs of the 5,700,000 people who are totally dependent upon us for electricity in their homes and in their jobs. Without a very substantial increase in the supply of burnable coal, AEP and other electric utilities will not be able to meet the electric power needs of our people. Our responsibility for energy supply to the more than 5.7 million people who are totally dependent upon us has, in our view, made it not merely appropriate, but imperative, that we inform them and the public generally of the facts of life with respect to energy supply. Coal-particularly low-sulfur coal-is in very tight supply. As a result, its cost has been skyrocketing-more than quadrupling in the last few years. During that time, coal prices have shot up froth about $10 per ton t.o as much as $40 per ton and more. In fact, according to a June 7 FPC news release, the price of spot coal jumped by more than 54 percent in just 2 months-from Decem- ber 1973 tø February 1974. And it is still rising. The AEP system expects to burn about 37 million tons of coal this year-second only to the Tennessee Valley Authority. To the extent that our advertising program succeeds in bringing about an increase in the available supply of coal, coal prices will be less than they otherwise would be, and this difference would be di- rectly and almost immediately passed on to our customers via the fuel adjustment clauses in our tariffs. PAGENO="0078" 112 Thus, n saving of $1 per ton would result in a $37 million benefit to our customers; a saving of as little as 25 cents per ton would bene- fit our ratepayers in an amount in excess of $9 million. For all of these reasons, it seems clear to us that the cost of these ads are properly chargeable above the line for ratemaking purposes because they are clearly for the benefit of our ratepayers: First, by attempting to assure an adequate and reliable supply of power for them; and second, by attempting to bring about a reduction in the cost to them of that power supply. With respect to the deductibility of our ads for Federal income tax purposes, such deductibility depends upon the intent and content of the particular ad. This is implicit in much of the testimony at the May 6 hearing. Prior to 1962, there was no legislation on the subject. It is important to understand that all of the court decisions on the point cited at the May 6 hearing dealt with taxable years governed by the Internal Rev- enue Code of 1939, and relied on broadly worded regulations. Similar language of broad scope was contained in the original regulations un- der the Internal Revenue Code of 1954. Congress legislated on this matter for the first time in 1962 by adding section 162(e) to the Code. The 1962 provision was liberalizing legisla- tion which permitted the deduction of, among other things, costs in- curred in connection with legislative appearances-expenses which theretofore were nondeductible. In 1965, the Treasury Department adopted regulations under new section 162(e). These new regulations do not go so far in the direction of denying deductibility as did the old regulations. This was admitted by Mr. Shulman, who stated that C~* * * pre-1965 IRS regulations appear to have taken a broader view in favor of non- deductibility." The point is that it is the more liberal 1962 code and the more liberal 1965 regulations that apply to the ads in question. On the other hand, the court decisions calling for nondeductibility cited at the May 6 hearing were all decided on the basis of regulations which are no longer in force. There have been no court decisions under the liberalizing 1962 legislation which are in point. Our guidelines, therefore, are limited to the language of the pres- ently applicable statute and the regulations promulgated thereunder. 1 have attached for the subcommittee's information as an exhibit to my testimony a tax memorandum by Mr. Gronningsater seting forth our position on the application of the statute and regulations to our ad program. I will only attempt briefly to summarize that position here. The regulations under section 162(e) of the Code focus upon activi- ties which urge or encourage the public to contact members of a legis- lative body for the purpose of proposing, supporting, or opposing legislation. A deduction is denied in such cases. However, the regulations also explicitly recognize that "expenditures for advertising which presents views on economic, financial, social, or other subjects of a general na- ture," but which does not involve any of certain activities specified in other subsections of the regulations, are deductible. In AEP's current advertising program, 20 ads have been published to date. Only one of these ads specifically urges or encourages the public to contact their legislative Representatives. PAGENO="0079" 113 We do not propose to deduct the cost of that ad for Federal income tax purposes, even though the ad makes no reference to specific legis- lation. Of the remaining 19 ads, 11 make no mention of legislation; and their costs, we submit, clearly are deductible. The "Mr. President" ad referred to by Mr. Shulman at page 30 of the May 6 transcript is in this category. However, I would note for the record that that ad preceded and is not a part of our current advertising program. The remaining eight ads, one of which was referred to by Mr. Shulman at page 20 of the hearing transcript, do refer to the neces- sity for amending the Clean Air Act if we and other electric utilities are to continue to be able to furnish an adequate and reliable supply of electric energy to our customers. However, these ads also refer to a number of other things, and the readers are not urged to contact their legislators or, in fact, to take any action whatsoever. While the matter may not be free from doubt, it is the considered opinion of our tax counsel that the applicable statute and regula- tions, which undeniably are more liberal than the old regulations, do permit the deduction of the cost of these eight ads. I would like to conclude, Mr. Chairman, by saying `that it has been our experience that those who oppose the deductibility of advertising costs of their chargeability above the line are generally also opposed to the substance of those ads. At least in our minds, `this gives rise to the inference that those who disagree with what we say, by urging reinterpretation or changes in the tax or regulatory laws, may in fact be attempting to inhibit us from speaking out on issues which we believe are of vital concern to those we serve. In the case of our current advertising program, tax and ratemaking factors applicable to this advertising were not a consideration. Presumably, these questions will be decided at the appropriate time by the tax and regulatory authorities. However, in order to emphasize, in order to bring home the point that these factors really were not a consideration in our ad program, and in order to prevent this very peripheral issue from detracting from the important message that we are trying to convey, we propose, for accounting purposes, to charge the costs of our current advertising program to FPC account No. 426.4-a below-the-line account-even though, as I indicated earlier, we believe that they could properly be accounted for above the line. Our objective has been to lay the facts regarding energy supply problems before our customers and the American public generally, just as effectively as possible. This, we believe, we are doing-and in the context of our current energy problems, this we believe we have an ob- ligation to do. Thank you. Senator HART. Thank you very much. Mr. Dowd, I confess after reading your statement and listening to your testimony, making some notes, what I had earlier described was a narrow focus, 1-day hearing on an issue I thought I completely understood, raises a whole series of very basic policy questions. PAGENO="0080" 114 I will ask Mr. Bickwit to sharpen up some of your comments about the specific ads. I think that although it was inadvertent, all of us will be better here in Congress for having opened the broader hearing. Mr. BIOKwIT. Thank you, Mr. Chairman. In your statement you say that the solution to our energy problems, at least for the short and mid-term, is greatly to increase the production and use of coal to gen- erate electric power. What, precisely, in your view should Congress do to achieve that objective ~ Mr. DowD. Basically, it should, in our view, amend the Clean Air Act to make it absolutely clear that it was the intention of Congress to protect the public health and welfare by maintaining the ambient standards and that the owner of an emission source, if he is able to meet the ambient standards, should be permitted to employ whatever method he feels to be most appropriate. Now, by that I mean the so-called intermittent control strategy should be regarded as a full fledged alternative to emission limita- tions. On the AEP system, we feel that we can avoid contributing to violations of the ambient standards in our areas through the use of tall stacks which we already have. Through a very sophisticated monitor- ing system which has already been installed throughout system and through a commitment to reduce emissions when atmospheric condi- tions create problems. Now, emissions can be reduced in one of two ways. Either by burn- ing `a limited supply of low sulfur coal kept on-site for use during such times or by diverting generation to a plant outside of the area where the atmospheric problems exist. This is one principal method. Tinder this program, low sulfur east- ern coal continues to be burned. Now, the other major factor and this does not necessarily require congressional action, is to lift the mora- torium on the leasing of the coal lands in the West. There are vast quantities of very low sulfur coal that would meet existing requirements. This can be mined quickly, it can be mined safely. Mr. BlcKwrr. Are you saying that in your view the action you have specified as legislative is essential for the purposes you seek? Mr. DOWD. Yes; this is our view. I might mention one other thing that is presently before the Congress. And that is the surface-mining legislation. Again it is my understanding that the Udall bill would, in effect, rule out the use of additional large quantities of the Nation's coal. And this is a factor that the `Congress ought to look very care- fully at in this period of energy crisis. Mr. BICKWIT. In your statement you say: The basic purpose, or thrust, of our advertising program is to inform `the pub- lic as to these facts `and hopefully `bring about an increase in the production and available supply of coal so that we can meet these electric power needs. it is your testimony then, as I underst'and it, that the basic purpose of your `ad campaign is to achieve goals which you have `also said really `cannot be achieved without legislation. Mr. Dowr. Well, there are two-we have said clearly in `a number of our ads that the Federal-that the Clean Air Act must he amended to permit intermittent controls. Insofar `as the western coal is con- cerned, that actually can be done by administrative action. We are PAGENO="0081" 115 telling the public that unless actions similar to these are taken, we are going to have a very, very difficult situation this time next year. Mr. BICKwIT. On the coal mining as I understood your testimony you are also saying that if legislation like the lJdall bill passes, then your goals cannot be achieved. Mr. DOWD. That our goals cannot be achieved? Mr. BICKwIT. Yes. Mr. Down. I would say that a bill such as the TJdall bill would com- pound the situation and make unavailable to us very, very substan- tial additional quantities of coal that :are presently available. So, it would compound our problem, certainly. Mr. BIOKwIT. Given that the basic purpose of your and campaign was to achieve goals for which legislation is needed or for which the opposition-certain opposition to legislation is desirable, is it also your testimony that the ads dealt with in the hearings of this subcommittee were aimed at influencing legislation? Mr. DowD. The basic purpose was to inform the public particularly in our service areas as to what we regard the facts of life as to energy supply and the problems we are facing with respect to energy supply. To the extent that we refer to amendments of the Clean Air Act, yes; we were advising them that unless the act were amended to permit intermittent controls, it would be very difficult if not impossible to meet the power requirements next year. Mr. BIOKwIT. So, your testimony is that your ads were aimed at informing the public and that it was the end of those ads to promote the result of expanding the supply of coal for the production of electric power. Mr. Down. This was the hoped for ultimate end of the ad. There was another purpose. We are aware of the situation; we are in the front line so to speak. We have to think in terms of the future. Where will we get the coal? And in that sense we have an obligation to advise, we feel, our cus- tomers of the situation whether they do anything about it or not. Our concern in part is that in 1 year or 2 years from now, they will come back and say why didn't you tell us these things. We will have fulfilled that obligation. Mr. BI0KwIT. But your basic purpose as you say was to bring about an increase in the production and available supply of coal. Mr. DowD. I would say yes to that question. Mr. BICKwIT. In that you were informing the public and that you re- garded that as an objective of your ads, and given that the basic purpose of those ads was to expand the supply of coal for electric power, how did you expect that informing the public would lead to the basic purpose being accomplished ~ Mr. Dowi. Well, it seemed to us that one method would be to, through administrative action, to release the moratorium, to lift the moratorium on western coal. In one of our ads we specifically asked the public to contact their Congressman. In the other ads we did not do so, as I say, we lay the facts before the public. We tell them what problem there are. We tell them what we believe the solution to the problem is, and then it seems to me we just have fulfilled our obligation in that sense. 42-367-75----6 PAGENO="0082" 116 This was what we were trying to achieve. Mr. BICKwIT. Yes. Mr. DowD. Now, they can contact their Congressman and seek amend- ments to the Clean Air Act, they may not, but at least we have told them what the problem is and we have told them how we think the prob- lem can be resolved. Mr. BICKWIT. But you have said that it was your intention that by informing the public as to these facts, you would hopefully bring about an increase in the production and available supply of coal. Mr. DowD. Yes. Mr. BICKwIT. My question to you is, How did you expect that to happen? Mr. DowD. Well, in two ways. We would hope that the ads would stimulate interest on the part of the public and that they would exert pressure, that they would contact their representatives in terms of the Clean Air Act. This was a hope and on the other side with respect to the western coal moratorium, this as I indicated is something that can be done without legislative action, that if they would contact the appropriate administrative officials, the ultimate goal really being not so much to increase the supply of coal as to be able to generate electricity to supply their needs in the future. Again, the increased availability and usage of coal is an essential step to the ultimate goal which is to continue to supply these people with electric power. Mr. BICKWIT. Well, if you were informing the public to this end, the end that you have just mentioned and you hoped through the in- forming of them that they would be spurred into contacting their Congressman, the obvious question is why was this not an attempt to influence the public with respect to legislative matters? Mr. DOWD. Are you talking now on the tax side or the accounting side? Mr. BIOKWIT. Yes. Mr. Dowry. I will pass this to Mr. Gronnin~sater but we are oper- ating under specific language statute and specific language in specific regulations. Mr. GR0NNINGsATER. In the first place as Mr. Dowd has pointed out, there are two things involved here. Insofar as releasing western coal for mining is concerned, that is not a legislative matter. The 1962 legislation refers only to legislative matters in the context of these ads. On May 6, there was testimony by Mr. Lester Fant who stated they had been requested by this subcommittee to look into these matters, section 162(e). He made an analysis of the present requirements of nondeductibility under the new regulations those were operating under. First, is that there must be a reference to legislative matters. That does not include, I do not think the administrative action. The second was that there must be an attempt to influence the gen- eral public and that I think, is the point that you are speaking of, Mr. Bickwit. Then he said, now, these are the only two specific legislativerequire- ments. But I think-he said that he thought that it could inferred from the congressional purpose that there was really a third test, and that was-unless the advertising, unless there was a conflict of interest PAGENO="0083" 117 in the advertising, between the business of the advertiser and what he called the selfish business of the advertiser and the interest of the public, the cost of the ad should be deductible. Now, our opinion is and maybe other people will differ with it, these ads are not against the interest of the general public. We think they are in the interest of the general public. Mr. BIOKwIT. Under questioning, Mr. Fant, as I understood him, amended his testimony to say that all that would be required would be some conflict of interest between the business and some identifiable segment of the general public. Now it seems clear from testimony we have received that an identifiable segment of the general public regards it as a conflict of interest. Mr. GRONNINGSATER. What an identifiable segment of the general public would be. You have an interest contrary to the purpose of our ads. We are of course, primarily concerned with our own service territory. Mr. BlcKwrr. Excuse me, I missed that. Mr. GRONNINGSATER. We are primarily concerned with our own service territory and our own customers `but we are also, in a sense, speaking of the problems of our industry as a whole. Mr. BIOKwIT. Well, the identical segment of the general public I am speaking of are those who do not want to see the Clean Air Act repealed. Mr. GRONNINGSATER. Well, there is no definition of so many of these terms. I wouldn't have thought that that was a segment of the public. Because here you have, you are speaking of the Nation as a whole. And you `have a person here who believes that so and so, and his next- door neighbor believes something else. I would not have thought that that was a segment, an identifiable segment of the general public. Mr. Fant `also, to give an illustration of selfish business interest, spoke of trying to make more profit or, well, one way or another try- ing to make more profit I think was the thrust of his example. That is not what we are trying to do here. We are trying to be able to continue to furnish adequate and reliable service. One of the thrusts of our ads is to try to get the cost of coal down. Being a regulated company, if the cost of coal goes down, our rates go down. Mr. BICKWIT. Is it your testimony that if the cost of coal goes down your rates go down, you make no increase in profit ~ Mr. Down. That's correct because we have automatic fuel clauses in our tariffs. As the cost of coal goes up, these increases are automatically passed on to the public in the form of higher charges for electricity. Should those costs either go down or not go up as rapidly as they other- wise would as a result of increasing the available supply of coal, then `this benefit would almost automatically and immediately inure to the benefit of the ratepayers without the power company itself making a profit. Mr. BloKwrr. If you sell more electricity, do you make more profit? Mr. Down. I think our rates are subject to regulation, and the answer `to that is yes, we get an allowed return. So, the more electricity that is sold, the greater the net income of the company would be under normal circumstances. Mr. BICKWIT. Wouldn't a lowering of rates bring about an increase in sales? PAGENO="0084" 118 Mr. Dowry. Well, there is a big, big debate as to the elasticity of demand for electricity. We feel that there probably is some elasticity when you are in the area of pure wastage or when you are in an area where there are substitutes available. But even in the field of space heating we are in a query whether there are substitutes available with coal and natural gas being in such short supply. That is a very difficult question to answer. If the rates were to go down-really what we are talking about is that they would not go up as rapidly as they have been going up; I think as a practical matter that would be the net effect of this. Mr. GRONNINGSATER. If I might add a word to that, we have testified before, years ago, in other connections, about elasticity of demand. But that was in a period, speaking about making more profit, of rela- tively stable costs. In fact, all we had was decreases. We are not in a posture where everything has gone up so, capital costs, the cost of money, the cost of fuel, that may be suspended for awhile. What we are really looking at is to be able to continue to supply our customers. Mr. BICKWIT. Are you subscribing to Mr. Fant's analysis in saying that under that analysis your ads are deductible? Mr. GRONNINGSATER. I am saying under his analysis, I am not say- ing he is 100 percent right in every respect, but this was his analysis. Mr. BIOKwIT. And under his analysis you believe those ads are deductible. Mr. GR0NNINGSATER. Yes. Of course, there is one ad where we sug- gested to the reader that if he agreed with us that he get in touch with his Congressman. As Mr. Dowd testified, we do not propose to deduct the cost of that ad. Mr. BlaKwrr. Why is that? Isn't that motivated by the public interest also? Mr. GR0NNINOSATER. Well, simply because there is so much emphasis in the new regulations on urging the reader to get in touch with his Congressman. As Mr. Dowd testified, tax was not an important consideration here at all anyhow. But with that emphasis in the regulations on contact- ing your legislator, we don't want to argue about that. Mr. BICKwIT. Is it your view that the urging of the public to contact one's Congressman is what makes an ad nondeductible? Mr. GR0NNING5ATER. Well, what the word should be, I don't know. That is something else. As you say, this whole program of ads, broadly speaking, has the same thrust. This was brought out in the May 6 testimony by Media Access Project. There is an emphasis on that in the new regulations that there was not in the old regulations. Mr. BICKwIT. Do you feel it is controlling? I guess the better way to put the quest.ion is, are you saying that if you don't urge the public to contact a Congressman, that it is deductible? Mr. G-R0NNING5ATER. Well, that would depend to some extent on the purpose of the advertising, perhaps. But in the context of our ads,. I would say yes. It should be deductible. Now, the matter of course is not free from doubt. There has been, as Mr. Dowd testified, there has been no case under the-involving PAGENO="0085" 119 taxable years covered by the new legislation and regulations that really is closely enough in point to cite. Mr. BIcKwIT. Now, why isn't the Consumer's Power case covered by the new regulations? Mr. GRONNINGSATER. It involved the years 1954 to 1957. Mr. BICKWIT. That `s right. Mr. GRONNING5ATER. It came down in 1970, but involved the years 1954 to 1957. Mr. BICKwIT. That's right, but which regulations did the court apply in that case? Mr. GR0NNINGsATER. Well, what the court in effect applied was perhaps the old regulations that were promulgated over and over again under the 1939 and earlier years, because the specific language in this field, well, for these years, were not promulgated until 1959. Now, it is true, let me retract that, because by the time this case was decided those regulations had been promulgated. Even though they were promulgated after the end of the taxable years involved. As Mr. Shulman emphasized, in the old regulations there was language about propaganda that had no tie-in to do anything else, no tie-in to legislate matters. And that is not so under the present regulations. Mr. BICKwIT. In the regulations, as I read them, there is-that were applicable to the Consumer's Power case-a reference to promoting or defeating the legislation. And there is a definition of promoting or defeating legislation which as I read the regulations is the same definition as applicable to ads run today. Do you disagree with that? Mr. GRONNINGSATER. Which language is that? Mr. BICKWIT. Well, I am looking at 1.102-20B, 1 and 2. Mr. GRONNINGSATER. That is the present regulations, yes. Mr. BICKWIT. That is the regulation that was applied in the Con- sumer's Power case. Mr. GRONNINUSATER. Well, I don't know that I would agree with that. But this- Mr. BIoIcwIT. I can read it. Mr. GR0NNINGSATER. Yes, I have it right in front of me. Mr. BIcIcsvIT. No, but I can read the reference of the court to that regulation which means to me that that was the regulation they applied. Mr. GR0NNINGsATER. OK, if this is B2, and regulation 20, it refers to influence, says, "Expenditures for the promotion or defeat of legis- lation included but shall not be limited to expenditures for the pur- pose of attempting to influence members of a le.oislative body directly, which is not involved here, or indirectly by urging or encouraging the public to contact such members for the purpose of proposing support- ing or opposing legislation." There is part of your emphasis on contact- ing your legislator. Mr. BICKWIT. Yes, but that obviously is a nonexchisive example. The words, "but shall not be limited to," are there as plain as can be. Mr. GRONNINGSATFR. Yes. But all the examples given in these reg- ul ations involve contacting your legislator. Mr. BICKWIT. That's right, but every example is qualified by the words, "but shall not be limited to." Mr. GRONNINGSATER. Well, reasonable men can differ. PAGENO="0086" 120 Mr. BloKwrr. On the meaning of the words, "but shall not be limited to"? Mr. GRONNINGSATER. No, not on that. On the thrust of the present regulations. Mr. BICKwIT. Well, the only point that the staff would want to make is that the Co~umer's Power Co7mpany case which applied this regu- lation, in the view of the staff, stands for the proposition that you needn't contact your legislator, you needn't urge that legislators be contacted in order for the ad to be declared nondeductible, in that under the facts of that case, many of the ads disallowed did not so urge the readers. And I would agree with you that reasonable men might differ on the meaning of the statute and the. regulations. But I have difficulty agree- ing with your proposition that after the Con~vimer's Power Company case that reasonable men might differ on this. Mr. GRONNINGSATER. Well, we are dealing now with a set of regula- tions which covers both years before 1963 and years after 1962. And when you look at years after 1962, 1 think you have to look at the regulations as a whole. Obviously- Mr. BIOKwIT. Excuse me. Mr. GRONNINGSATER. Those who testified in the May 6 hearing also felt in doubt about the situation. Most of~ the thrust of what they said was that rules should be changed, the Treasury should go back to its old regulations. And there might be come question whether they could under the new legislation. But they talked a great deal about what they thought the rules should be and not what they are. Mr. BI0KwIT. But in their testimony as to what they were, it was the conclusion of the witnesses that your ads should be classified as nondeductible. And as I understood their testimony they based it in large part on the Consumer's Power case which in the opinion of the staff does appear to be applicable to situations such as yours. Mr. GRONNINGS~TER. Well, I don't know how important this is. But one of the factors in the Consumer's Power case was that the court, and this was a sixth circuit opinion, was that the-that there had been a factfinding by the lower court and the circuit court felt that it didn't want to disturb, it indicated some doubt in the matter, but did not want to overrule the finder of the facts. Mr. BIcKwIT. That's right, but the finder of fact must have said, "You don't have to say, `Write your Congressman,' in order for this ad to be declared nondeductible." And I have heard no cases on the other side for the proposition that you do have to say, "Write your Congressman~" in. order for an ad to be declared nondeductible. Perhaps we ought to leave, it at that. Mr. GRONNINGSATER. OK. Mr. BI0KwIT. You mention that you have reconsidered the matter of the ads in question for FPC a.ccounting purposes. Can you tell us what factors account for your not having reconsid- ered their tax treatment, also? Mr. DOWD. WeJI, I think-first let me explain the basic factor with respect to the accounting treatment that we propose to report to these expenditures. It is basically to avoid an element of controversy that we think is very peripheral. We don't want them to cloud the b~i~ meg- sage that we are trying to convey here. PAGENO="0087" 121 Now, it was our feeling that the language under the Internal Reve- nue Code and the applicable regulations was more liberal than the language in the FPC's, the Uniform System of Accounts. This also is a factor. I might mention one other thing. As I say, neither accounting for these expenditures nor their deductibility for tax purposes was really a factor or a consideration in the program. If they are all charged be- low the line, if they are all nondeductible, we would have gone for- ward with this program in any event. I might mention one factor. Maybe Mr. G'ronningsater could clarify it a little bit. But as far as a nondeductibility for tax purposes for these ads is concerned, whether they are deductible or not, it is almost a moot question. Last year the American Electric Power system did not pay Federal income taxes, and that particular `situation is at least a possibility or a probability this year. And Mr. Gronningsater could elaborate on the reasons for that. But whether we deduct them or not is really small potatoes in the whole context here of what we are trying to accomplish. Mr. BlcKwrr. Did Mr. Gronningsater want to elaborate? Mr. GRONNING5ATER. Only to the extent of emphasizing once again that tax deductibility was not a consideration in this program at all. The first time it was brought to my attention was after the-the first time I heard of it was after the May 6 hearing when we received a tele- phone call from a magazine about this matter. I then investigated around the company and found that this subject hadn't been raised with anybody concerning the taxes. Mr. BIcKwrr. I would like to close with one final observation. That is your view that the ad was in the public interest or conceived by the company running it to be in the public interest, then under all `circumstances, unless you urge your Congressman, it will be deducti- ble, it does strike the `staff that there would be very little left of the tax law in question given that, as I read the companies in question, vir- tually all of them regard that their ads are in fact in the public interest. Do you react at all to that? Do you have a reaction to that? Mr. GR0NNINGsATEn. Yes, I would have a reaction. I have read these ads-I haven't read all the hundred ads mentioned in the testimony, but I have read `some of them and personally have the feeling that those involved were trying to carry ou't their duties and responsibil- ities. Those, the various advertisers, were trying to lay facts before the public and trying to carry out their duties and responsibilities. And, if Mr. F'ant is correct, that the cost is deductible, if there isn't a con- flict of interest between the advertiser and the public, why, then, and I don't say that he is necessarily, but if these ads are all in the interest of the public and Mr. Fant is correct, then the cost should be deductible. Mr. BlcKwrr. Again for the record, as I understood Mr. Fant, he referred to an identifiable `segment of the public. He was not explicit on how you identify a segment of the public, but as I understood him, his view was that if there were a number of interests that reacted adversely to the advertisement, that there would be the needed conflict of interest. Mr. GR0NNINU5ATER. Well, I believe-I would suppose Mr. Fant got into that in connection with the statutory language, any attempt to influence the general public or segments thereof. PAGENO="0088" 122 Now, I don't believe there is any definition of segments thereof. I don't recall Mr. Fant- Mc. Bicuwrr. There is no definition of selfish interest, et cetera. Mr. GROXNINGSATER. Well, you get into a question of fact as you do on so many tax things. Mr. BIcuwIT. That is true. The one case we have that resolves those facts based on the regulations applicable to your situation seems in my view to have been resolved in contrary to your interest. Thank you. very much. Mr. DOWD. Mr. Bickwit, I would only point out one further thing. That is as t.o 11 of our ads they made no reference to legislation. Not only did they not ask the public to take any specific action, but they made no reference whatsoever to legislation. And our position with respect to those ads is that they are clearly deductible for action pur- poses. The area that is muddy in our view is the one where we do make reference to specific legislation, but we do not ask the public to take any action whatsoever. We feel there is a difference of opinion as to that one under the regulations and under the law. You may disagree, and Mr. Fant may disagree. And the IRS may very well disagree, but that remains to be seen if the issue is actually put to them. Mr. BIGKWIT. And I should add that this disagreement comes from someone who is not a tax attorney and has had very little experience with the tax court. Senator HART. How or under what procedures does the IRS under- take to audit an issue such as this? Is there any, perhaps I should know, is there some established method? Mr. GRONNINGSATER. This is true of most large corporations; we are under continual audit, in effect. And the audit is very thorough, and well, let me say that I am in the legal department of our company. We have a separate tax department. And the audit is carried on with the tax department and the head of the tax department. But I have spoken to him about this, and he told me that our advertising all the time, apart from this new program, is ve.ry carefully scrutinized. Senator HART. Scrutinized by the tax department of the com- pany~ Mr. GRONNINGSATER. No, scrutinized by the Internal Revenue Serv- ice on audit. In the audit of any one group of years, taxable years, it takes years, it is a very thorough, lengthy audit. Senator HART. Gentlemen, thank you very much. Mr. DOWD. Thank you, Senator. [The exhibit follows:] ExHIBIT A DErnjcTIBILIrY OF ADVERTISING EXPENSES FOR FEDERAL INCOME T~&x PTJRPOSES Whether the cost of non-product advertisements is deductible for federal income tax purposes depends upon the content of the particular ad. This is im- plicit in much of the testimony at the May 6, 1974 hearing before the Snbcom- nilttee on the Environment of the Senate Commerce Committee. Prior to 1962 there was no legislation on the subject. All of the court decisions on the point cited at the May 6 hearing dealt with taxable years governed by the Internal Revenue Code of 1939, and relied on broadly worded regulations. Similar language of broad scope was contained in the original regulations under the Internal Revenue Code of 1954. PAGENO="0089" 123 Congress legislated on this matter for the first time in 1962. The Revenue Act of 1962 added Section 162(e) to the Code, applicable to taxable years beginning after December 31, 1962. The 1962 provision was liberalizing legislation. Paragraph (1) of Section 162(e) permits the deduction as ordinary and necessary business expenses of, among other expenditures, costs incurred in connection with legislative appearances, expenses which previously were nondeductible. Paragraph (2) of Section 162(e) provides that paragraph (1) "shall not be con- ~strued as allowing the deduction of any amount paid or incurred * * * in con- nection with any attempt to influence the general public, or segments thereof, with respect to legislative matters, elections, or referendums" (emphasis sup- plied). It may be of some significance that paragraph (2) does not say in so many words that the cost of attempting to influence the public with respect to legislative matters is not deductible. Sections of the Code which disallow deductions typically state explicitly that "no deduction shall be allowed" for certain amounts or expenses; see, for example, Sections 261 through 279, "Items Not Deductible". In 1965 the Treasury Department adopted regulations under new Section 162(e). These new regulations under the liberalizing statute do not go so far in the direction of denying deductibility as did the old regulations. In his May 6 testimony Mr. Harvey J. Shulman of Media Access Project, after proposing that there be changes in the present statutory and administrative provisions to narrow the field of deductibility, stated (page 48 of the transcript) `As I have previously indicated, pre-1965 IRS regulations appear to have taken a broader view in favor of non-deductibility. Specifically, expenses associated with `the exploitation of propaganda' were not to be deductible. * * *" The regulation under Section 162(e) of the Code is Reg. § 1.162-20. Paragraph (c) of that regulation is captioned "Taxable years beginning after December 31, 1962". The pertinent part of paragraph (c) (1) is as follows: * * All other expenditures for lobbying purposes, for the promotion or defeat of legislation (see paragraph (b) (2) of this section), for political cam- paign purposes * * * or for carrying on propaganda (including advertising) relating to any of the foregoing purposes are not deductible from gross income for such taxable years. * * *" (Emphasis supplied) Paragraph (d) (2), which is referred to in paragraph (c) (1), reads as follows: "(2) Enpenditures for promotion or defeat of k~gislation. For purposes of this paragraph. expenditures for the promotion or the defeat of legislation include, but shall not be limited to, expenditures for the purpose of attempting to- (i) Influence members of a legislative body directly, or indirectly by urging or encouraging the public to contact such members for the purpose of proposing, supporting, or opposing legislation, or (ii) Influence the public to approve or reject a measure in a referendum, initiative, vote on a constitutional amendment, or similar procedure." The only other language in the regulations dealing with Section 162(e) (2) of the Code is paragraph (c) (4). It reads as follows: "(4) Limitations. No deduction shall be allowed under section 162 (a) or any amount paid or incurred (whether by way of contribution, gift, or otherwise) in connection with any attempt to influence the general public, or segments thereof, with respect to legislative matters, elections, or referendums. For example, no deduction shall be allowed for any expenses incurred in connection with `grass- root' campaigns or any other attempts to urge or encourage the public to contact members of a legislative body for the purpose of proposing, supporting, or op- posing legislation." (Emphasis supplied) ~\Te are not here concerned, as was the Supreme Court in the Cammarano case cited to this Subcommittee in the May 6 testimony, with a matter on which the general public is to vote. There has been no court decision under the liberalizing 1962 legislation which is helpful in determining the deductibility of the cost of advertisments such as those which have been the subject of these hearings. Our guidelines are therefore limited to the language of the statute and the new regulation there- under. This regulation, in denying deductibility in some instances, places very con- siderable emphasis in paragraphs (b) (2) (i) and (c) (4) on urging and en- couraging the public to contact members of a legislative body for the purpose of proposing, supporting or opposing legislation. The regulation, in paragraph (a) (2), allows deductions for "expenditures for advertising which presents view-s on economic, financial, social, or other subjects of a general nature, but PAGENO="0090" 124 which does not involve any of the activities specified in paragraph (b) or (c) of this section for which a deduction is not allowable". American Electric Power System ads fall into three categories: 1. `Some of the ads inform the public on certain problems connected with the energy shortage and are concerned with assuring an adequate and reliable supply of electricity. Companies which are subject to regulation are not permitted to cease rendering service, or to limit their services, unless permitted by the regulatory agency or by legislation. Specifically, electric utilities have the duty and responsibility of providing reliable and adequate electric service at reason- able cost. We believe it is clear that these ads, which neither ask the reader to contact a legislator nor make any specific reference to legislation, are deductible. 2. Some of the ads, in addition to making certain other points, state that the Clean Air Act should be amended if the American Electric Power System and the industry as a whole are to be able to furnish the adequate and reliable serv- ice which it is their duty to provide. These ads pursue what we view as an educational program to that end. The readers are not urged to contact their leg- islators, or to take any kind of action at all. The ads merely lay the facts before them. We believe that under the 1962 legislation and the new regulations, un- deniably more liberal than the old regulations, the costs of these ads are deductible. 3. One ad we have published, urging the necessity to burn coal (of which we have ample reserves) instead of oil or gas (which are in short supply), requests the reader who agrees to send the ad to his `Congressman. Even though no legislation of any kind is mentioned, we do not intend to claim a tax deduction for the cost of this ad. In summary, we i~elieve that the costs of all the ads we have published, with the possible exception of the ad referred to in 3 above, are deductible as ordinary and necessary business expenses. July 18, 1974. Senator HART. Next is Mr. E. F. Loveland, vice president of `Shell `Oil Co. Mr. Loveland. STATEMENT OP E. P. LOVELAND, VICE PRESIDENT, MARKETING- COMMERCIAL SALES, SHELL OIL CO. Mr. LOVELAND. Senator, thank you very much. My name is Gene Loveland, vice president of marketing-commercial sales. I appreciate very much the opportunity to be here on behalf of my, company to express our views on this topic. We have already outlined in written communications to the sub- committee chairman the position Shell intends to take regarding the tax status of the two 1974 advertisements which are questioned in your study. Rather than repeat t:hose statements, which explain why we consider the advertisements to be tax deductible, I wish to comment `today on what Shell believes is really `at stake in any investigation of this subject. First, we recognize that the current regulations take the position that no advertising is tax deductible if it attempts to influence the public with respect to legislation. On one point, we `agree with those who testified earlier before this stibcommittee. We, too, believe that generally there has been an im- balance in the news and information available to the American public in the mass media today. But the imbalance tilted not in favor of business, but rather agamst it. It is indeed a sad state of affairs when business finds it necessary t~ resort to advertising `to clarify important issues affecting its activities. Advertising is one of the least effective ways of `doing this particular job. PAGENO="0091" 125 Comments printed in editorial columns and aired on daily news programs are far more effective. Lacking ready access to these high- impact media, we chose to publish the two advertisements in question simply because our critics had been eminently successful in using both the print and electronic media to present their views of our profits to the public. Our advertisements thus were essentially a defensive move designed only to properly balance the perspective on the subject. And their exposure, when compared with the printing ink and air time re- ceived by our critics, amounted to a bb shot in response to a salvo. That `situation was not unique. Even today, if both Ralph Nader and a businessman were to `hold press conferences in Washington on the same subject, whose comments would predominate in the pages of tomorrow's newspapers and in tonight's newscasts? Critics of business, such `as Mr. Nader, have little trouble in getting their views `before the public. They don't have to advertise because their views are publicized free. The businessman would have trouble even getting a reporter to cover his press conference. We do not question Mr. Nader's right to speak out or the press' right to cover and publish his views. We are only saying that it has been difficult to get all the relevant tacts `about business published today. Also, let me make it clear that I `am not singling out Mr. Nader. However, his statements `are representative of the criticism leveled at business these days. I have brought along a few articles clipped from our daily newspapers as examples of what I mean. In the interest of time, I shall read only a few of the headlines. They represent the gist of the news that was spread across America in January, when our ads were published. "Nader charges energy scare designed to double oil prices." "Aspin claims oil companies gouging public." "Senator claims oil shortage put-up job." "Jackson says oil firms irk public with evasions." Often, `antibusiness, antiprofit system messages are run on the air free of charge. With your indulgence and permission, I would like to play a tape recording of such a message that was sent to over 400 radio stations across the Nation by a group called Public Interest Communications. Senator HART. Yes, do. Mr. LOVELAND. If this won't come through, I will try to read it. [The taped material played is as follows:] HosT. Welcome to Highway Robbery. The game where giants of industry see just how much they can get away with. ANNOUNCER. Thanks, Bob. Our first contestant today is Mr. Robert Baron, President of the Windfall Oil Company. BARON. Howdy. ANNOUNCER. On our last show Mr. Baron got away with the Alaska Pipeline, the oil depletion allowance, numerous anti-trust exemptions, astronomical price increases and record profits. HosT. Well, that's quite a haul, Bob! Well, Mr. Baron, what would you like to get away with today? BARON. Total control of the world's resources, Bob. HosT. Total control of the world's resources! How about that! And just how 1o you intend to get away with that, Mr. Baron? BARON. Well, Bob, I thought I'd sorta stop pumping my old wells and make the public pay to* get me a whole bunch of new ones. I'll just tell `em no money, no oil, know what I mean? PAGENO="0092" 126 HosT. Oh, ho, sure do. Mr. Baron. Well, Bob, he wants to control the world's resources. ANNOUNCER. That's right, Bob. Let's see if our audience will let him get away with Highway Robbery! Senator HART. That is tough. Mr. LOVELAND. I thank you for your indulgence, but I just wanted you to know how someone like us feels when something like this goes out across the Nation. Senator HART. Out of curiosity, do you have any idea how many stations picked that up? Mr. LovEI~m. Our first alert on this was our own employees who called in from various parts of the Nation. And we do have an or- ganization that does media research, a California-based audio-video reporting service, who told us it did go to 400 stations. How many played that, I frankly don't know. But it got pretty good coverage because our people were a little disturbed about it. This message was not only aired free of charge, but also was funded by contributions which then could be deducted from income taxes since Public Interest Communications is a nonprofit organiza- tion. Thus, this message was free of any tax charges. Is it any wonder that in such circumstances business has turned to advertising in an attempt to tell its story? At times, it seems to be the only way a business has to express its point of view on subjects important to its future, The American people have nothing to fear from this kind of adver- tising. In fact, they stand to gain by it. The average citizen is sensi- ble enough to know when he is being sold a bill of goods. But this holds true only if he has the opportunity to consider all sides of the important issues of the day. In our view, our laws should encourage the free exchange of ideas. Our concern should be not how to further limit the access of busi- ness or anyone else to the mass media but rather how to make the mass media more available for the free exchange of information and ideas so vital to the functioning of a democracy. Why should the people who oppose the ideas of business have the opportunity to express their views free, while more often than not, business must pay for the same right? If the tax deduction for insti- tutional or goodwill advertising is denied to energy-related companies~ would we not then be forced to pay nearly a double penalty for the right to free speech and the use of a free press? One of the issues that precipitated the American Revolution was the Stamp Act. It would have greatly increased the cost of newsprint in the colonies and thereby made the cost of expressing ideas almost prohibitive. The issue facing us today i~s little different. We should not levy an economic penalty on the business community for express- ing its views. It seems to us that opponents of business are now asking you to penalize business for expressing its views or else to find some way of limiting what it can say in the mass media. Here, it is appropriate to express another concern. Trying to de- fine what is propaganda and what isn't, what should be said and what should not be permitted, is a difficult matter fraught with risk. PAGENO="0093" 127 You are being asked to consider ways to limit what business can say in tax deductible advertising. This is the same old problem censors face everywhere: Where do you draw the line? Who will be affected by today's decisions, tomorrow? How do you define what is proper `and what is not? In our textbooks, the `only historical guide that had any merit was the prohibition on obscenity, and today even obscenity is proving difficult to define. In closing let me say that recently, we have been more successful in getting our views across in the mass media-without resorting to the kind of advertising being studied by this subcommittee. The media are being more evenhanded as they gain insight into the complexities of the energy problem. We do hope, however, that no one has been lulled into complacency regarding the energy problem confronting this Nation. It is a serious problem and one that will be with us for some years to come. Thus, it is conceivable that from time to time we at Shell may again find it `necessary to advertise to make the facts of the situation known to the public. Although we do not believe that advertising is the best way of getting our views on vital issues across to the public, we would not ihesitate to use it again if there were no other way to do the job. Shell endorses `t;he idea of an open society in which the ideas of all people may be freely expressed, in which the public has access to the information and facts it needs to have in a democratic society. Only in this way is there any hope that balanced, sensible views will ulti- mately prevail. I thank you. Senator HART. You `have heard me say earlier today, one part of `the problem, and understandably it is not the one which you face, is that this is an emotionally loaded matter, the impoverished good idea. What can we do? Though the impression may not be very strong, I recognize the desirability of permitting the strongest and the most powerful among us-corporate or individuals-freedom to effectively present their ideas. But how can we insure an effective presentation by the least powerful `of their ideas, because `the balance sheet doesn't determine who's got the better idea at all. Mr. LOVELAND. Well, I wonder, Senator, if that is in fact a need. In other words, you have mentioned the impoverished. We are talking here about a climate of antibusiness that is using sensationalism to bang away at them. And I don't know of any medi'a or any newspaper ivho would take that tack relative to the impoverished. So I am not sure that we can say that this situation does occur or would occur. If they have a particular message `and it is of interest, I think we can assume that the media in this case would pick it up, because this is the nature of our country, to play up the little fellow, to- Senator HART. I think that's an attitude those of us who are more comfortably situated generally accept as valid. But if we were uncom- fortably situated, I am sure we could cite to this committee, and Shell Oil, a dozen groups, welfare mothers. Now recently they managed to get a point of view across. But that is typical of a group. I am not sure that given the limitations of time on television and the way you have to put a newspaper together, that the advantage that comes from wealth is not still significant in your ability to get ideas out. PAGENO="0094" 128 Mr. LOVELAND. I think we have a unique situation here. We had a particular moment in history where we have just waves of this sort of a situation focusing in. And we attempted to push those back and even the waters. Senator HART. I agree that the roof seemed to fall in on you at that particular point in history. Mr. LOVELAND. Yes. I think as we had said earlier, we have got to open this up. I think you have recognized today that your committee is getting broader in this activity. And I think somewhere along the lines we have to address ourselves to the media. Because here in our estimation was a segment of our society who neglected their responsi- bility and resorted to sensationalism which had to be counteracted. Now maybe we should ask them, as I have many, many times, going back to where I worked with young people, I used to wonder why it was that the Eagle Scout and some of the other do-gooders and scholar- ship boys hit the last page when the murderers and rapists were on the' front page. And I asked that, why are these teenagers here? And usually the answer is well, it sells papers, it creates circulation, it is a better Nielsen rating. I think these are the things we have to say, that they have a responsi- bility to present the facts and they have a total responsibility to all people. I think this is the area that we have to open up. Senator HART. Well, narrowing it a little now, in your advertising program, are you familiar with how Shell determines in the case of a particular ad whether it is or isn't deductible? Mr. LOVELAND. Well, in our advertising program, we have had two forms of advertising. We have our product advertising, mainly out of our marketing department, and we have had our institutiOnal out of our public affairs area. We have never considered our type of institu- tional advertisting in a tax situation or a tax problem. We do not have, as in the case of Mobil, a long-term dedicated type of message that they are on. Ours was an emergency situation, at the time we ran four ads. We felt that these were public education ads and what they should know. We talked about price and how the Cost of Living Council established the price and why they were paying that price at the service station. We talked about the allocation program. There was tremendous confusion among people and all classes of customers on how that allocation program sorted out and who had priorities and who didn't, and so forth. We ran an ad which graphically. described that. Then we ran the ad talking about our profits, and then-which is one of the ads in question. And we ran another one depicting our results and what those results meant. What they meant in cash generation, the need for cash generation, how if this world was going to continue to enjoy the measures of its energy and so forth, that cash generation was a must. And it didn't occur to us that we were involved in any legislation or lobbying in any way. But we felt that because the media had'~ neglected their particluar responsibility, we had to tell the public' where this oil was, what it was going to take to get this oil, and what it would mean to them in the way of conservation and other items.. It is a public service. Senator }Lu~T. Since then, have you taken a reading on the deducti- bility or nondeductibility of any of those ads? PAGENO="0095" 129 Mr. LOVELAND. No; we haven't. Well, I say we haven't with any tax- ing body. Our own tax people are quite firm, as I have indicated in our letter, quite firm on their position. And as far as a true reading, of course, that will not occur until these are filed coming into next year. Mr. BICKwIT. On the tape recording that you played, you say that was sent to over 400 radio stations. Do you by any chance know how many of those stations actually played the tape on the air free of charge? Mr. LOVELAND. No; I don't know whether we could find out. We employed Audio-Video Reporting Services through a Mr. Erickson of Monte Rio, Calif., to tell us how many of these were sent out. And this is what he told us. Now whether they have a reading, I can try to find out and report to you, whether they have a reading on actual airing of that. Mr. BIOKwIT. It would be useful for the record. Mr. LOVELAND. We will send you that if we have it. [The following information was subsequently received f9r the record:] SHELL `OIL Co., Washington, D.C., August 19, 1974. Hon. PHILIP A. HART, Chairman, Subcommittee on the Environment, Senate Commerce Committee. Dirksen Senate Office Building, Washington, D.C. Di~ian \SENATOR HAaT: The following response has been provided to me by `Shell's Head Office in Houston in reply to your inquiry of July 18, 1974, at the Commit- tee on Commerce, Subcommittee on the Environment, hearings on Corporate Energy and Environmental Advertising. We refer to the Transcript of Proceedings of July 18, 1974, in which Mr. Bickwit of your staff requested available information on the actual airing of the "High- way Robber" radio tape. We can confirm at least that the following stations aired this tape: KSFO-San Francisco, Calif. KFRC-San Francisco, Calif. WAB'B-Mobile, Ala. KPFT-Houston, Tex. Our own employees reported the above stations to us `and, undoubtedly, other stations used the tape, but we have no way of knowing this. Sincerely, J. CARTER PERKINS, Vice President. Mr. BI0KwIT. This is a question that you may have some difficulty with, but I feel it~is appropriate to ask. In your view, would a company run ads like the ones in question, even if in your view they were nondeductible? Mr. LOVELAND. I think they would. I don't think that was the ques- tion. The point was, here was a void, and that void had to be filled. If we have to pay for that expense, it would be worth the money. We think it is a matter of principle and not a matter of dollars. Mr. BI0KwIT. In the advertisement entitled, "How in all conscience can anyone call these excess profits ?"is it your intent in that ad to influence the public? Mr. LOVELAND. Well, maybe we have a matter of semantics. You are talking about influence and we are talking about education. We are talking about `bringing to the public the facts, and the facts are that this is our profit picture, this is how we attained it and this is why we need it. PAGENO="0096" 130 Mr. BICKWIT. Do you think influence is an improper character- ization? Mr. LOVELAND. Well, influencing legislation because we were not involved in legislation, I would say influence might be stronger than we felt. We felt it is educational. I think the end of our ad says all we ask is that the Government and the public approach the subject with objectivity and a minimum preconceived-of preconceived notions. After all, we have basically the same ends in mind, that is, providing for the needs of the American consumer as well and as fully as pos- sible. And these are the educational facts to back that up. Mr. BICKwIT. ~\`ell, I wouldn't go on in semantics except that it is relevant to the tax matter. But when you have got a camapign for an election, you have got two people running against each other and some people support one guy and some people support the other guy. If you go out and give to the public facts with respect to why a particular one of those is better, it strikes me that education is perhaps not nearly as good a characterization of what you are doing as influence. Mr. LOVELAND. But you are saying influence. And I would have to say influence what or for what reason? Ours was not a matter of in- fluence. We found ourselves in a position in an energy crisis with in- formation about the energy crisis antioil up here and facts about it down [indicating]. So I am saying we needed to educate the people and bring the true facts to them and bring that up here. Now if we go beyond this point and we are trying to peddle some fish, for a par- ticular situation or a particular bill, then we are influencing. But when you bring the people up to a knowledgeable level of understanding of the oil business, which is as I must say, a most difficult job, then to me that is education. Mr. BICKwIT. So it is the reference to legislation which in your view decides the question of whether there is- Mr. LOVELAND. Reference to education and influence. I can't under- stand what we are trying to influence. We are not trying to influence anything, we are trying to educate the people in the very facts of the case. And the facts are, this is the money we made. This is the money that we would have made had there not been inflation. This is the need. And this is what is going to bring you more oil. Mr. BTcicwIT. The problem is that those who perceive those facts entirely different from you-and there are many that do-have diffi- culty characterizing your role as that of an educator~ just as that guy who wants to vote for President Nixon has difficulty, conceiving that the guy who is out campaigning for McGovern is educating. Mr. LOVELAND. I am sure. we are equally admant in our particular positions and probably another forum will resolve it. Mr. BICKWIT. Again, as was pointed out with the last witness, if your understanding of what is educational, as opposed to influential, were accepted, it is very difficult to see what remains of the law which says that you may not deduct when you are influencing the public with resnect. to legislation. Given that, any one who confronted the question of whether he was so doing could, under the way you define the term education, resolve it in favor of the fact that he was educating' rather than influencing. Mr. LOVELAND. Well, I have to start with a point that it would anpear that certainly the media had an almost zero knowledge of the oil industry. If they didn't have a zero knowledge, then they didn't PAGENO="0097" 131 report it very well. So I start from that point that I have an uneducated public and I have an uneducated media, and therefore, I have to put the facts before them. They prefer not to put the facts there, so we put the facts there. Those are facts. Now, I don't consider them in- fluence. Mr. BI0KwIT. You don't consider that educating the public with respect to the nondesirability of certain legislation is in any way trying to influence the public with respect to that legislation? Mr. LOVELAND. I am talking about these two ads and I am talking about the situation. And I don't know about the noninfluence of legis- lation. I am not aware of any legislation. Mr. BI0KwIT. There was legislation referred to in the excess profits ad. Mr. LOVELAND. Well, that is only to establish the entire ad in posi- tioning, and let them know in total what is going on and is, I feel- comes under the category of facts. Mr. BI0KwIT. Again, if we view it that way, Congress may well have legislated a nonlaw. Thank you very much. Mr. LOVELAND. Thank you. Senator HART. The exchange was very interesting. I don't want to acknowledge that Congress has legislated a nonlaw. But I do acknowl- edge that education by itself, from its Latin derivation suggests influence. Mr. LOVELAND. Once the man puts the education into practice. Senator HART. More influence than it is education. As far as the semantics go, I think we ought to acknowledge that the root derivation of the word education is really influence, to lead. Mr. LOVELAND. Well I- Senator HART. Yet I fall back, having said that, that there are iden- tifiable situations where it is more to influence than to inform. Mr. LOVELAND. I just have to say that we had a bad situation of ignorance prevailing in this country relative to the oil industry. And we felt facts were necessary because one segment did not give them in sufficient quantity to satisfy, let's say, the education of these people. And, therefore, we attempted to fill that void and lay out the facts. Senator HART. Thank you very much. Mr. LOVELAND. Thank you, Senator. [The articles referred to follow:] [Daily Times News, Mt. Pleasant, JTan. 30, 1974] NADER CHARGES ET~ERGY SCARE DESIGNED To DOUBLE OIL PRICES (By Dick Westlund, News Editor) The energy crisis is a fabrication of the oil industry, created to double the price of petroleum products, according to consumer advocate Ralph Nader. Speaking before 8,000 people at Rose Center Arena last night, Nader indicted the federal government and energy czar William Simon for pursuing policies harmful to the public interest. "The data that have come out in recent weeks show there are adequate fuel supplies," charged Nader. "The question is if they are being allocated fairly." He also said that the major oil companies are driving out independent retail distributors, pressuring the government to remove pollution controls and grant tax incentives and moving in on oil lands owned by the United States. "How could they pull this off?" he asked. "They are exploiting a massive gap in the citizenship." 42-367-75----7 PAGENO="0098" 132 To stop this trend, Nader applauded the work of consumer groups such as the Public Interest Research Group in Michigan (PIRGIM). He said that the way to regain control over business conglomerates is through citizen action, not bureau- cratic regulation. Nader received half a dozen bursts of applause for his attacks on Simon and major oil companies. "Washington plays Charlie McCarthy to the oil companies," he said. Citing Atomic Energy reports on nuclear power, Nader said that it would be "technologically suicidal" to rely on nuclear power as a prime source of energy, as suggested by President Nixon. "They are fragile nuclear baskets that could bring catastrophic risks to this and future generations," he emphasized in a press conference before the speech. Although the danger of an explosion is small, `he said, the danger of a break- down in the cooling system, with resulting melting of the nuclear core, could cause release of radioactive fallout throughout an area the size of Pennsylvania. "Consumers has had serious problems in design `and operating deficiencies (in Michigan)," he charged. Nader said `that the public interest research groups and groups of his student "raiders" would `be focusing on nuclear plants. "We have all got to face up to the nuclear plant situation" he stated. "Do we want to live next to these kinds of plants ?" What is the cure for the energy shortage? First, eliminate the 30 to 40 percent of wasted energy in our society. He said most industrial and commercial plants can and are cutting consumption by 15 to 25 percent just by applying measures of thrift. In the long run, Nader sees solar energy as being the chief source of electrical energy. "Why not use the sun? Farmers use it all the time," he commented. Nader stressed that solar energy programs have not `been developed because it is provided free. He said that `the U.S. government has spent $20 million on solar energy research, compared to $80 billion for the moon program. "One of the greatest ironies of modern society is that we have put on the shelf terrific ideas for quick, easy energy (from the sun) ," Nader added. `Appearing angry at government actions in favor of the oil industry, Nader called for support of a bill to create a federal energy company, along the model of the Tennessee Valley Authority (TVA). Such a company would provide independent information to the government, serve as a spur to competition with private companies and assure an emergency supply of petroleum. Such a move would by-pass superficial questions of rationing or granting in- centives to private companies, and establish a solid base for citizen involvement, according to Nader. In this way the nation could be self-sufficient in energy by 1980. Pollution controls and environmental safeguards are vital to energy develop- ment, stated Nader. Gas emission controls should be strengthened and produc- tion of Alaskan and Gulf of Mexico oil fields should be safeguarded. "If little Honda can produce an engine that meets governmental standards, it seems difficult to imagine that a company like Gene'ral Motors can't," he said in response to a question. AsPIN CLAIMS ODL COMPANIES GouGING PUBLIC (Post Washington Bureau) WASHINGTON-Rep. Les Aspin, D-Wis., charged Wednesday night that major oil companies are using their "monopoly power to gouge the consumer" on fuel oil and gasoline prices. Aspin, one of Congress' strongest critics of the oil industry, asked the Ameri- can Petroleum Institute (API) why fuel oil costs are zooming upward at a time when supplies are higher than last year and demand is relatively unchanged. Fuel oil supplies, used to heat homes in the East and Midwest, are 28.5 per cent higher now than a year ago, the congressman claimed, and demand is up by only 5.4 per cent. Despite that, he said, API and Labor Department statistics show retail prices climbed by 30 per cent in the first 11 months of 1973. "The oil companies are taking advantage of the psychology of a fear of shortage to price gouge," Aspin charged. PAGENO="0099" 133 If petroleum was really a "free market" industry where prices were set by demand, he claimed, fuel oil prices should be going down-not up. "The fact is," Aspin said, "that the oil industry is basically monopolistic and is holding back and hoarding products to increase profits." He said gasoline supplies-based on API and Labor Department figures- are 2 per cent lower than a year ago, with demand up by 4 per cent. Under those circumstances, a "slight" increase in pump prices would be under- standable, Aspin said. But gasoline costs are "going through the ceiling," he complained, and are "totally unjustified." [Lansing, Mich., State Journal, Jan. 25, 1974] SENATOB CLAIMS OIL SHORTAGE Pup-lIp JOB (By Lee Hickling, Gannett News `Service) `WASHINGTON.-Sen. Frank `E. Moss thinks he has found out why there was a fuel shortage in the Plains states last winter. He says it was a put-up job. `The Utah Democrat also believes what he says be learned about last winter's shortages has taught him to ask the right questions to `find out whether this win- ter's fuel shortage scare is real. Moss says he and his staff found `out that, while residents of his state and of the Northern Plains were shivering through on a short supply of fuel oil, there were millions of `barrels of oil piling up in tanks along a'pipeline from Texas to New York City. Moss doesn't think it happened by mistake. He `thinks it was deliberately done for two reasons-to get higher pri'ces traditionally paid in the Middle Atlantic and Northeastern states, instead of the lower price-controlled rates in the Plains, and secondarily, to beef up the big oil companies' case for raising prices on their prod- ucts as a means of preventing shortages. What `he found out, Moss feels, forms a nearly-perfect example of the way `big, vertically-integrated oil companies misuse their power over petroleum from the wellhead to the consumer. There is a major pipeline from the oil fields of Texas and Louisiana, past Atlanta, Washington, D.C. and Philadelphia, to New Jersey and New York City. It is owned `by the `Colonial Pipeline Co., which in turn is owned by 10 big oil companies-Texaco, Cities Service, Gulf, `Standard Oil of Indiana (American), Mobil, BP, Continental, Phillips, Union and Atlantic-Richfield (Arco). It is a principal carrier of oil products from Gulf Coast refineries to the populous middle and upper East Coast. `In the winter of 1970-71, the refineries moved 79.7 million barrels of Number 2 `heating oil through Colonial to market. In 1971-72, it was 83 million barrels, a 4 per cent increase, which was, Moss said, a reasonable increase to expect. If there had been another 4 per cent increase in 1972-73, Colonial would have carried about 85.6 million barrels. Instead, it carried more than 98 million bar- rels-so much that nearly two million of it never got to market `by April 30, 1973, but remained undelivered in tanks along the way. There is another big pipeline conecting with the same Gulf Coast refineries that use Colonial, the Explorer Pipeline north past Tulsa and St. Louis to Chicago. At Tulsa, Explorer connects with the Williams Brothers pipeline, a major ar- tery for oil products to the Upper Plains states. Moss' staff is still trying to nail clown the answer to one `big question: were shipments over the `Williams Brothers pipeline and other routes to Upper Plaina fuel oil markets cut by about the amount pumped in excess to tanks along the Colonial pipe? "We have heard from reliable industry sources," Moss said, "that deliveries. from Explorer (to Williams Brothers at Tulsa) ran more than 20 per cent be- low what was forecast by Explorer shippers no more than 12 months earlier.'~ Moss's consumer subcommittee of the Senate Interior Committee subpoenaed figures. Williams Brothers did not dare SU~~i~ them without a subpoena. for fear of being sued by some of the major oil companies, a striking bit of evidence of the majors' hammerlock on the U.S. oil market. They are still trying to make sense out of the mass of data and see whether the reports Moss heard are confirmed. More support for his claim that fuel was deliberately shunted from the Plains to the middle and north Atlantic states is found, Moss says, in the production records of refineries operated by a major oil company. Which one, he won't say, PAGENO="0100" 134 because the information was given him with the understanding it was "pro- prietory." According to Moss, this company has several refineries, a big one on the Gulf Coast and others serving the Plains states. But the latter plants, in the face of last winter's regional shortage, did not do what they had done in previous years- change over to produce larger quantities of fuel oil. In fact, they put 800,000 barrels of heating oil into storage tanks and never let it out to market. Meanwhile the company's Gulf Coast plant increased its fuel output "enormously," Moss said, by 3 million barrels over the previous winter. The fuel was all shipped northeastward over the Colonial pipeline. "Even though the in- crease in Gulf Coast production would have been adequate to supply the Plains states," charges Moss, "very little, if any, of this fuel ever reached the Williams Brothers pipeline, and thus never reached the Plains states." Unless there was a plan agreed on by the major oil companies to withhold oil from the Plains states. Moss wants to know, how could they all decide si- multaneously to change their supply plans? If there were competition, one com- pany would rush in to grab the market that another was neglecting, he says. Moss admits that he doesn't have all the figures he needs to prove that the shortage was phony. Most refiners and pipeline companies refused to answer his subcommittee's questionnaires. But he said the investigation is continuing, and meanwhile we have gained "a glimpse of the phenomenal manipulations which have taken place in the oil industry, manipulations due to the overwhelming power of vertical integration." Another congressman who has been ahead of his colleagues in trying to under- stand the operations of the vast, intricate network of interrelations that exist between the major oil companies is Rep. George E. Brown, Jr., P-Calif. Brown took a step almost without precedent for a Congressman last year-he filed a brief with the Federal Power Commission against a request by two natural gas producers and a gas pipeline to raise the price of gas from 26 to 46 cents per thousand cubic feet. Brown said the evidence is overwhelming that the price was not arrived at the negotiation in a competitive market, but agreed on by "two subsidiaries of the same corporate giant." This is the industry pattern, he said. To attempt to prove his point, he filed a brief that unraveled some of the tangle of relationships between one major firm, Texaco, and other oil and gas producers. Texaco or its subsidiaries, Brown said, owns Louisiana oil leases jointly with Exxon, Amoco, Shell, Mobil, Atlantic-Richfield, Chevron, Getty and Union Oil. It has an interest in 55 offshore leases from the federal government, and 29 of them are jointly held with Amoco (Standard Oil) of Indiana. Abroad, Texaco is one of the four big partners in the Arabian-American Oil Co., with Exxon, Chevron (Standard Oil of California) and Mobil. Texaco and Chevron jointly own Caltex, which produced $2.3 billion worth of oil in 1971. Texaco is one of the major partners in Iranian Oil Participants, the "consortium" that controls oil from the rich fields in Iran. Others are Mobil, Exxon, Chervon, Gulf, BP, Shell, Atlantic, Signal and Getty. Texaco and other major producers share ownership of many `big interstate pIpe- lines, Brown went on: Texaco has 22 percent of Badger Pipeline, 5 percent of Dixie, 34 percent of Laurel, 14 percent of `Colonial, 27 percent of Wolverine, 9 per- cent of West Shore, 40 per cent of Wyco, and 45 percent of Texas-New Mexico. When it comes to oil and gas wells, in the Permian Basin of Texas, Texaco owns 42 jointly with Atlantic-Richfield, 23 with Cities Service, 19 with Conti- nental, 25 with Getty, 23 with Gulf, 19 with Mobil, 18 with Shell, 22 with Phillips, 30 with Amoco, 22 with Exxon, 10 with Standard Oil of Ohio, 23 with Sun and 11 with Union Oil Co.. according to Brown's research. "It can be `argued," the Californian conceded, "that there are good economic reasons for the close economic interrelationship of oil and gas producers. There is no question that substantial economic savings can be realized in joint ven- tures . . . The problem. however, is that these substantial joint interests create an atmosphere of close cooperation rather than competition. We have, in effect, created a cartel." JAcKsoN SAYS OIL Fin~rs IRK PUBLIC WiTH EVASIONS (By Jack Cleland, Chronicle Washington Bureau) WASHINGTON.-The Senate permanent investigations `subcommittee continued its interrogation of seven major oil company executives today in an attempt to find out if the fuel shortage is for real. PAGENO="0101" 136 Subcommittee Chairman Henry Jackson, P-Wash., chided the officials Monday for their reluctance to disclose current figures on earnings and stocks of crude oil and refined petroleum products. He said their less than responsive answers to the questions posed to them, explains the public's general skepticism that the energy crisis is really a contriv- ance to boost prices. Jackson released a compilation of the companies' inventory stocks showing that they had an increase of 5.5 percent of crude and products on hand at year-end 1973. The oil company witnesses took the general position that the 1973 figures do not reflect the tight world crude supply situation, aggravated by the Arab boycott. Most of the officials were generally pessimistic about the crude supply situation, even if Arab oil is released, citing the growing world demand for petroleum products. They warned against punative legislation or taxes against the petroleum In- dustry which would be counter productive to the national goal of making this nation self sufficient in energy. In response to questions posed by Jackson, each or the officials denied his respective company had a shut-in crude oil capacity it was keeping off the market. They also denied allegations that their companies were keeping oil in tankers offshore waiting for prices to rise even higher. Jackson singled out Exxon Senior Vice President Roy Baze for the company's refusal to furnish the subcommittee with information about service station closings. Exxon contended, in response to a subcommittee questionnaire, that this infor- mation was proprietary. Jackson noted that the other six companies, Gulf. Mobil, Shell, Standard of California, Standard of Indiana, and Texaco, all answered this question. Baze said Exxon had no objection to giving the subcommittee this information on a confidential basis but was concerned about discussing it in front of its competitors. Jackson said Exxon's position was "incredible." "How can we get the facts on this energy crisis if you mark the information proprietary?" he asked Baze. "I'm not trying to be unfair," Jackson said. "But this is what outrages the public." Baze finally broke down and recited the figures sought by Jackson. He said of the 12,084 Exxon stations owned or leased by the company since Jan. 1, 1973, 1268 closed but not for a lack of gasoline. The questioning dealt with oil company profits for 1973 which were generally higher than 1972, especially in the last quarter of last year. Most of the oil company executives explained that 1972 was a poor year for earnings and comparing 1973 to 1972 did not give an accurate picture of profit trends. Each executive denied his company w-as hoarding or stockpiling ~isoline at abandoned stations. They also denied having any knowledge of a black market in gasoline although Baze said that under a mandatory allocation program, like the one now in effect, the elements that breed a black market are there. SENATOR SAYS OIL FIRMS KNEW CRISIS WAS COMING SANTA FE, N.M. (A.P.)-TJ.S. Sen. Joseph M. Montoya, P-N.M., says major U.S. oil companies knew an energy crisis was coming in 1970, but took no real steps to protect the public. In a speech prepared for a joint session of the New Mexico Legislature Thurs- day, Montoya said as a result "the nation was unprepared" for the October Arab oil embargo. "In the three-year period the oil companies built no new U.S. refineries. They continued to plan on filling an ever-larger proportion of U.S. needs with foreign imports," Montoya said. "One problem we all face is that most of the figures we must work with come from the oil industry itself-no one, either in the administration or Congress- can assure us about statistics," he said. The senator said the United States imports a sixth of its oil now and by 1985 will import nearly half its needs. Senator HART. Our next witness is Mr. Sam Black, Tax Analysts & Advocates. PAGENO="0102" 136 STATEMENT OP SAMUEL BLACK, TAX ANALYSTS & ADVOCATES Mr. BLACK. Good morning, Senator. Senator HART. You may proceed. Mr. BLACK. Thank you. For the record, my name is Samuel H. Black. I am a staff attorney at the public interest law and research firm, Tax Analysts & Advocates. Senator, I don't have a prepared statement. I have an outline, which I would like to insert into the record at the end of my testimony. I would like to speak only briefly, and I will then be pleased to respond to whatever questions the committee might have. I appreciate the opportunity to be here, and appreciate the invitation extended by the committee staff. I am here in part as a neutral party, I think, neither representing a utility nor any of the public interest groups that are involved in the media or broadcasting field. Senator HART. Where does your money come from? Mr. BLACK. Tax Analysts, as we call it, is supported by the sale of publications. We have a weekly magazine. We sell other professional publications to tax professionals. We also have foundation grants and we have a national membership. I want to make just a few points. I have read the transcript of the earlier hearing and heard, of course, the presentations here this morning. I think that under the traditional way of looking at the corporation income tax or our income tax in general in this country. that it would be improper to characterize the deductible status of business advertis- ing or business lobbying as a tax subsidy. Our corporation income tax is a net, not a gross. income tax. And corporations are permitted-as individuals are permitted-to deduct the costs of doing business as they compute taxable income. If lobbying is seen as a cost of doing business, as it is. for example, for the utility and oil company wit- nesses who were here this morning, the costs are simply deductible from their gross income. And the fact that it is deductible is not a tax subsidy. Similarly, with respect to advertising: advertising a product is simply seen as a cost of doing business, and those costs are properly deductible from gross income to reach taxable income. I would assert, Senator, that if lobbying and advertising are directly related to the generation of income, they should be deductible from gross income in order to reach taxable income, and the deductibility wouldn't be a subsidy. As you know, and as this hearing has pointed out very well-unprecedentedly well-the revenue code does disallow deductions for grassroots business lobbying, usually taking the form of advertising. I would conclude, then, under the traditional way of looking at our tax system, that this is a tax penalty for business lobbying. Now, contrast that situation, which I view as involving a tax penalty, to the situation of public interest groups. The charitable deduction and tax exemptions for charities are true tax subsidies. They have little to do with the computation of net income. Many charitable organizations are able to lobby and are able to advertise, and they do so as beneficiaries of tax subsidies, so I would PAGENO="0103" 137 argue that overall, the Congress has chosen to subsidize the lobbying activities of charities more than it could be said that Congress may be subsidizing the lobbying activities of business. I prepared for today a very small chart pointing up one aspect of this problem. The chart, which I would like to insert in the record at this point, if I may, shows charitable organizations, their lobbying activities, and their eligibility for deductible contributions. [The chart follows:] CHAR lIABLE ORGANIZ ATIONS, LOBBYING, AND DE DUCTIBLE Fraternal Veterans Large public charities, large religious denominations Small public charities, pub- lic interest law firms Social welfare organizations May lobby withde- ductible'dona- tions. May lobby with deductible donations. May carry on sizable lob- hying programs with de- ductible donations. Eligible for deductible do- nations, but forbidden all but "insubstantial" lobbying, May lobby, but not eligible for deductible donations. All these charities are tax exempt. There are some charitable or- ganizations eligible for deductible contributions which may lobby to an unlimited extent. These include fraternal and ve:terans' organiza- tions. Some large public charities and large religious denominations may carry on relatively sizable lobbying programs, including advertising programs, if they so wish, with deductible donations. Small public charities, including public interest law firms and in- cluding by far most of the environmental groups are eligible for de- ductible donations, but are forbidden all but insubstantial lobbying. The effect of this restriction is greatly to impede, and almost prohibit, any kind of legislative activities on the part; of the small public chari- ties, environmental groups or public interest law firms. Last, at the right side of the chart, is the category which the tax code refers to as "social welfare organizations." These groups may lobby, but they are not eligible for deductible donations. I can give specific examples of how these various and capriciously varying, restrictions work. The veterans' groups, for example, can lobby against amnesty with deductible money, but a small religious denomination such as, for ex- ample, the Quakers, are not able to lobby for amnesty with tax-de- ductible contributions. The Catholic Church can lobby against abortion with deductible funds, but a woman's rights group would not be able to lobby for abortion with deductible funds. The Sierra Club is eligible to lobby, but isn't eligible to do so with deductible donations. The principal Sierra organization is not eligible at all for deductible donations, which, I think, was pointed out in the last hearing. I would argue then that within the class of charitable organizations, the environmental groups and public interest law firms are severely discriminated against vis-a-vis these other kinds of charitable organizations. Senator HART. This discrimination is the result of the Code itself? Mr. BLACK. Yes, sir, it results entirely from the statutory frame- work and not at all from interpretation. Of court, the Code provisions embodied in regulations, but only flesh out the intent of the Congress. PAGENO="0104" 138 These prohibitions, or their absence, are all contained in the revenue code. I think that this problem of discrimination among various kinds of charities, and the other problem, the nondeductibility of business grassroots advertising, is a situation with constitutional overtones. I think that to penalize businesses' grassroots lobbying is an embodi- ment in the tax code of an economic penalty based solely on kind of speech or the forum which is being used for speech. I think that is constitutionally quite questionable. With respect to the situation that the public interest law firms, including the environmental law firms and most environmental groups, the fact that they cannot lobby with deductible funds, whereas other charitable groups can and do, is another situation with constitutional overtones. I think there is an equal protection problem here, in that otherwise identical charitable organizations are discriminated against on the basis, if you will, of their first amendment activities. And, of course, not only is there a fifth amendment problem, but also a first amend- ment problem, since after all, what we are talking about here is speech. I think also that this committee's hearings, especially the earlier session, brought out another const.itutioiial problem which arises not only in section 162(e). but also in the sections which regulate the charities. The terms in the statute are very vague. I would argue, Senator, that the. terms in sections of the code which regulate char- ities, such as references to propaganda. references to influencing leg- islation, and references to substantial or insubstantial quantities of lobbying, are incapable of the kind of precise definition that the Su- preme Court requires when statutes attempt to regulate speech. In the area of speech, since first amendment rights are so important, the Supreme Court has long held that statutes must be drawn with crystal clarity, if you will, because it is crucially important that the people who are going to exercise first amendment rights have clear notice as to what they may or may not do. And vagueness in statutes regulating first amendment activities serves to chill those activities. I have iio way of knowing down at Tax Analysts what "substan- tial" or "insubstantial" lobbying is. Years and years of court cases and administrative interpretation have sTied no light on this term. In the case of a group as small as we are, in order to stay on the safe side of the Internal Revenue Service, we don't engage. in any kind of lobbying activities except those expressly permitted by the revenue rulings, such as my coming here today by invitation. This problem of insub- stantial versus substantial just doesn't worry very large organizations such as the Catholic church. The test doesn't apply at all to veterans and fraternal organizations. I think, to an admittedly lesser extent., that the phrase "legislative matters and grassroots lobbying," et cetera, in the code and regula- tions doesn't lend itself to any kind of clear definition which satisfies the Supreme Court's tests. In the last hearing Mr. Fant suggested that the term "legislative matters" should refer to any subject capable of being studied by a legislature. Mr. Bickwit challenged him on that, and said that that seemed too broad. Both these gentlemen are ex- perienced attorneys. Mr. Bickwit has plenty of experience in the Congress, and Mr. Fant is a tax attorney. It doesn't augur well for the PAGENO="0105" 139 constitutionality of the statute that two such attorneys' interpreta- tions could vary so much. Any administrative prerogative can be taken back by the Congress if that prerogative is granted by a statute. So under Mr. Fant's defini- tion, it might be argued that companies couldn't deduct certain kind of expenditures relative to lobbying in the administrative, process be- cause at any point next year or the following year, the Congress might decide that it delegated too much authority and was going to take it back, and that therefore the "administrative" matter is really a leg- islative matter. I would have a terribly difficult time defining that term. And I think that is the kind of vagueness problem that the statute embodies. The impetus that gave rise to these hearings, apparently, was that people among whom a principal concern was the protection of en- vironmental quality observed that there were millions of dollars being paid for advertisements that had to do with legislation, whether they fell under the restriction or not. And it was very unclear as to whether deductions were being taken or not taken for those advertise- ments. One of my purposes today is to show that within the class of char- ities, we have a similar problem with respect to organizations, tax benefits, tax deductions, eligibility for deductible donations, et cetera, all crucially tied up in important first amendment activities, including lobbying with respect to environmental legislation. It seems to me that one option open to the Congress here, and I think the better option in terms of constitutional policy is not to make the nondeductions rules of section 16~ more strict, or expanding the scope of activities which are nondeductible, but rather taking off these two burdens: the lesse.r burden on business advertising, and the over- whelming burden on legislative activities of charitable groups. The direction the Congress should take, in my opinion, Senator, is to re- move these restrictions or these excises, if you will, rather than in at- tempting to regulate speech more severely or in expanding the scope of the regulations or the statute. This direction, of taking these references to first amendment activ- ities out of the tax code and out of the hands of the Internal Revenue Service, since the discrimination against charities is so much greater, is the answer, Senator, to the problem you raised-which is a very real problem-of how can the impoverished idea find a forum. If this committee decides to try to act to solve these problems, that the direction it should take is in changing the tax code to allow charities to carry on reasonable amounts of legislative activities. And that, of course, would include the environmental charities. That concludes my remarks, Senator. Senator HART. I like the way you have phrased your VI, VI point. When one class constitutional rights are burdened relative to another otherwise similar class, the solution lies in expanding the liberties of the burdened class-not in murdening the favored class. That is a musically written sentence. Mr. BLACK. Well, thank you. I do think, though, that that is the way to resolve this conflict that you have articulated so well. Senator HART. Yes. PAGENO="0106" 140 Mr. BLACK. And that the relief should flow to precisely those en- vironmental groups for which I know you have particular concern. Mr. BICKwIT. Is it your view, that the IRS should adopt a proce- dure whereby public interest groups could challenge IRS rulings which they feel grant illegal tax concessions to the taxpayers? Mr. BLACK. That is really not up to the IRS. It is up to the courts because to allow that is to expand the rules of standing as enunciated by the Supreme Court. We believe strongly that when the Treasury or the IRS illegally softens the tax treatment on a group of taxpayers, that the public is injured; that there is no question revenues are not collected which would otherwise be collected; that there is resulting economic damage to the public at large and also to individual taxpayers; and that members of the public injured in such a way should, of course, be allowed to sue in order to bring these questions before a court. If that doesn't happen, there is simply no way for the courts to review this kind of illegal activity. I would point out there are half a dozen recent decisions in the Federal Court of Appeals for the D.C. Circuit which go to illegal activity by the IRS or Treasury in failing to collect tax. Mr. BICKWIT. How about at the administrative level? Do you feel the IRS procedures are presently adequate to allow citizens groups to express their views there? Mr. BLACK. Referring specifically to the section 162(e) problem, the citizens can challenge an ad, for example, by reporting it through the informer channels. If they get a reward, they know that the corpo- ration was trying to deduct something improperly, and they will know that the Revenue Service disallowed the deduction. There may be no other way of knowing how the Service is enforc- ing the law against such business interests. At Tax Analysts, prior to bringing most of our suits, we have filed a petition with the Commis- sioner and explained the rationale for our position. There have been several instances in which the Commissioner has said this is something we consider has merit, and we will study it and report the results to you. However, I will point out that we haven~t gotten any results yet from these petitions. It may be that there is something more that needs to be available. Mr. BICKWIT. As I understand your testimony, you are not op- posed to using the tax code to foster certain policy objectives. Your problem, rather, is that the existing taxes which in some way penalize forms of speech are constitutionally questionable? Mr. BLACK. Well, I agree much more with the latter half of your question than the former. Mr. BICKwIT. That is my question. Do you agree with the former? Mr. BLACK. Yes. Mr. BIOKWIT. I can't remember what the former was. Do you think the tax code should be used for policy purposes? Mr. BLACK. Yes, it is an instrument of Federal governmental policy just as the budget is. You could point out specific tax subsidies, and I might say this one, or that one, has been proven not to be cost effec- tive. If a subsidy benefits a high income class much more than a lower income class, then I would say that raises serious questions about the particular subsidy, but not about the overall question. PAGENO="0107" 141 Mr. BIcKwIT. Now, if you subsidize the speech of one person or one party to a controversy, do you think you have got constitutional prob- lems in that you haven't given the other side of the controversy similar subsidization? Mr. BLACK. Yes. Not only do I think there are constitutional problems with that, but I think that the present tax subsidies to fraternal and veterans' or- ganizations and the large charities as opposed the lack of subsidies to the smaller organizations, is unconstitutional and Tax Analysts has filed a suit to test the constitutionality of just this problem. And if the committee feels it appropriate, I can insert into the record the complaint in that suit which I have here. Senator HART. Yes, let it be printed. Mr. BLACK. It articulates the first and fifth amendment problems as we see them with the existing statutes as they apply to different kinds of charities. Mr. BICKwIT. But in your view, if you extend that kind of subsidy to all public interest groups, then you don't have constitutional prob- lems? And what does the industry say on the other side of the fence? Mr. BLACK. Well, I don't think business has articulated a position on the bills to allow charities to do a little more lobbying. There are such bills, and there were extensive hearings held in Ways and Means in 1972. Mr. BIcKwIT. We would be interested if for the record you might appraise industry's possible constitutional arguments with respect to- Mr. BLACK. With respect to section 162(e)? Mr. BICKwIT. No, with respect to the proposal you have made to give favorable treatment to all public interest organizations who speak out on a given matter. Mr. BLACK. I will be glad to do that. Mr. BICKwIT. If you could, it would be helpful. Perhaps I am being paranoid, but such arguments, I think, could be anticipated. [The following information was subsequently received for the record:] TAX ANALYSTS & ADVOCATES, Washington, D.C., August 27, 1~74. Mr. LEONARD BIcKwIT, senate Commerce subcommittee on the Bnvironrnent, Dirksen senate Office Building, Washington, D.C. DEAR Mn. BIcKwIT: During the hearings on the legislative propaganda activi- ties of energy and utility companies, you asked me if there wass business opposi- tion to recent proposals to liberalize the rules concerning the legislative activities of charities. A preliminary analysis of the 1972 Ways and Means hearings on such a proposal, H.R. 13720, turns up no indication of business opposition. The hearings contain several statements by representatives of charitable organizations `to the effect that most charitable interests do not conflict with business. A statement, by one member of Congress who is generally regarded as con- servative, argues that foundation managers are people who have been successful in business; the spirit of this argument runs contrary to the thesis that charity and business lobbying would conflict. A statement by the American Society of Association Executives, indicates no opposition to the bill, even though the organization's membership consists, in part, of business organization executives. The membership of the organization, however, also includes charitable association executives. The Society did suggest that a liberalization of the charity lobbying rules should be accompanied by a PAGENO="0108" 142 liberalization of the grassroots lobbying provisions of Sec. 162(e) of the Internal Revenue Code. Business interests would nevertheless have much at stake in a proposal to expand the effectiveness of public-interest groups in the tax, broadcasting, envi- ronment, safety, and consumer fields, to name only a few. You may find it useful, therefore, before you publish your hearings, to invite several corporrations and trade associations to take a position on the recent action by the Ways and Means Committee, announced on August 1, 1974, in Release No. 20, to lobbying by charities. Alternatively, you might invite these parties to comment on a pro- posal to liberalize both the Sec. 501 (c) (3) (Internal Revenue Code) and the Sec. 162 (e) rules simultaneously. Very truly yours, SAMUEL H. BLACK. Mr. BLACK. There wasn't any significant business response to the ~\Tays and Means testimony invitatjons or to the hearings themselves, as far as I know. Interestingly, the Treasury Department at the time took what this committee might see as an antibusiness position. They said they would support all charities being able to lobby, but only where there was a business interest already lobbying on the other side. Then other public charities came forward and said-the example I have in mind is a large mental health charity. They said there isn't any business interest against mental health and yet we cannot lobby either under present law or under this Treasury-this limited Treas- ury approval of the concept that where there was lobbying on one side, charities should be allowed to lobby on the other. So they forcefully made the argument, or at least the argument was forcefully made that charities should be allowed to lobby whether there was a business interest opposing them or not, whether it had al- ready been articulated or not. The specter of business opposition to charities' lobbying is something I haven't yet seen. Mr. BICKwIT. Well. if you conclude that under no circumstances would it be raised rationally, that would also be helpful. Mr. BLACK. I would also point out there are private hospitals and hospitals run by fraternal orders or veterans' organizations, pri- vate veterans' organizations. and the fraternal hospitals and veterans' hospitals are allowed to lobby under present law. And I haven't seen any private hospitals complaining of that. Mr. BICKwIT. Thank you, Mr. Black. Senator HART. Thank you very much. Mr. BLACK. Thank you, Senator, very much. [The material referred to follows:] IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA Civil Action No. 833-73 Tax Analysts and Advocates, 732 Seventeenth Street, NW., Washington, D.C. 20006 Taxation With Representation, 2369 North Taylor Street, Arlington, Va. 22207 V. George P. Shultz, Secretary of the Treasury, 15th Street at Pennsylvania Ave., N.W., Washington, D.C. 20220 Johnnie M~ Walters, Commissioner of Internal Revenue, 1111 Constitution Avenue, NW., Washington, D.C. 20224 PAGENO="0109" 143 AMENDED COMPLAINT FOR DECLARATORY AND INJuNCTIvE RELIEF; THREE-JUDGE COURT REQUESTED 1. This is an action to: a. Declare unconstitutional the restrictions on legislative activities contained in Sections 170, 501(c) (3), 2055, 2106, and 2522 of the Internal Revenue Code of 1954, as amended, "the Code", as violative of the First and Fifth Amend- ments to the Constitution of the United States, and b. Enjoin defendants from continued enforcement of those restrictions and of all applicable regulations and rulings thereunder. JURISDICTION 2. This Court has jurisdiction of this action under the following statutory provisions: a. 5 U.S.C. Sections 701-706, because this action seeks to hold unlawful agency action found to be contrary to Constitutional right, b. 28 U.S.C. Section 1331(a), because this action arises under the Constitu- tion and laws of the United States and the matter in controversy exceeds the sum of value of $10,000, exclusive of interest and costs; c. 28 U.S.C. Section 1340, because this action arises under the acts of Con- gress providing for internal revenue; and d. 28 U.S.C. Section 1361, because this action is in the nature of mandamus to compel an officer of an agency of the United States to perform a duty owed to the plaintiffs. PLAINTIFFS 3. Plaintiff Tax Analysts and Advocates (Tax A/A) is incorporated under *the District of Columbia Non-profit Corporation Act. Tax A/A's organizational purposes are (a) to improve public understanding of the federal tax system, and (b) to improve the administration of the tax laws by conducting a public interest tax law practice. (Affidavit attached) 4. Plaintiff Taxation with Representation (Tax/Rep) is incorporated under the District of Columbia Non~profit Corporation Act. Tax/Rep's organizational pur- pose is to educate Congress and the public regarding federal tax issues by presenting the testimony of tax professionals at legislative and administrative hearings on tax matters. Tax/Rep has approximately 850 members throughout the United States. (Affidavit attached) 5. The Internal Revenue Service (IRS) has ruled that plaintiff Tax A/A is eligible to receive contributions which are deductible to the donor under Section 170(c) (2) of the Code and that Tax A/A is exempt from federal income tax under the provisions of Section 501(c) (3) of the Code. The IRS has ruled that plaintiff Tax/Rep is not eligible to receive contributions which provide tax deductions to the donor, but that it is exempt from federal income tax under Section 501(e) (4) of the Code. DEFENDANTS 6. Defendant George P. Shultz is Secretary of the Treasury of the United States and is charged by law with the administration of the Code; he dis- charges this responsibility both directly and by delegation to subordinates. He is sued in both his official and his individual capacity. 7. Defendant Johnnie M. Walters was, at the time the original complaint was filed, Commissioner of Internal Revenue, and, as the delegate of the Sec- retary of the Treasury, had overall responsibility for administration of the Code. He is sued in both his official and his individual capacity. 8. In administering the Code defendants have enforced the statutory pro- visions that are at issue in this action, and the regulations and rulings which interpret those statutory provisions. Those provisions are Constitutionally in- valid, and defendants' application of those provisions to the detriment of the plaintiffs violates the Constitutional rights of the plaintiffs. THE STATUTORY FRAMEWORK 9. Sections 170 (c) (2), 2055, 2106, and 2522 of the Code (hereinafter "the Code's charitable deduction provisions") provide for the eligibility of charitable and educational organizations to receive charitable contributions which are PAGENO="0110" 144 deductible for tax purposes by the payor or donor. Section 501(c) (3) of the Code provides exemption from federal income tax for charitable and educa- tional organizations. Each of these sections conditions its tax benefits on the requirements that "no substantial part" of the activities of these organizations consists of "carrying on propaganda, or otherwise attempting, to influence leg- islation". This condition wifi hereinafter be referred to as "the Code's restric- tions on legislative activities". 10. Section 501(c) (4) of the Code provides exemption from federal income tax for organizations "operated exclusively for the promotion of the social welfare" and does not restrict their legislative activities. Yet 501(c) (4) or- ganizations of the type exemplified by Tax/Rep are not eligible to receive con- tributions which provide tax deductions to the donor. 11. The Code grants -the benefits of tax exemption and eligibility to receive contributions which provide tax deductions to the payors or donors, without imposing restrictions on ieigslative activities, to the following organizations: a. Veterans organizations, contributions to which are deductible for the donor under conditions imposed by Sections 170, 2055, and 2522 of the Code, which sections impose no limits on the use of these contributions for legislative activities. b. Fraternal beneficiary societies, contributions to which are deductible for the donor under the conditions imposed by Sections 170 and 2522 of the Code, which sections impose no limits on the use of these contributions for legisla- tive activities. c. Trade associations, chambers of commerce, and similar business associa- tions, payments to which are deductible for the payor under the conditions im- posed by Section 162 of the Code and which are free to carry on unlimited legis- islative activities (other than grassroots appeals to the general public) when- ever legislation has a direct relationship to the payor's business interests, and d. Labor and agricultural organizations, dues contributions to which are deductible for the payor under the conditions imposed by Section 162 of the Code and which are free to carry on unlimited amounts of legislative activities (other than grassroots appeals to the general public) whenever legislation has a direct relationship to the payor's business interests. INJURTES SUFFEBED BY THE PLAINTIFFS 12. Plaintiff Tax A/A desires to engage in substantial legislative activities in support of its charitable and educational purposes. In many cases, such activ- ities are the only available means for pursuing these purposes effectively. How- ever, plaintiff Tax A/A cannot engage in substantial legislative activities with- out jeopardizing its tax benefits under the Code's charitable deduction and tax exemption provisions. 13. Because the Code's restrictions on legislative activity are inherently vague, plaintiff Tax A/A is unable to establish precisely which, or to what extent, activities are prohibited by those restrictions. As a consequence, plaintiff is forced, in practice, to adopt a very broad reading of the restrictions on legisla- tive activities and to eschew a variety of activities that may not, in fact, be proscribed. 14. Plaintiff Tax A/A is severely injured by the Code's restrictions on legis- lative activities in carrying out its charitable and educational purposes be- cause many other organizations, such as those described in paragraph 11, suprc&, which are in all pertinent respects similar to plaintiff, but which express view- points opposed by plaintiff, are free to engage in legislative activities while enjoying the benefits of tax exemption and eligibility to receive contributions which provide tax deductions to the payors and/or donors. - 15. In order to raise funds to support its charitable and educational activities, plaintiff Tax/Rep desires to enjoy the same tax benefits as are enjoyed by other charitable and educational groups, including eligibility to receive contributions which provide tax deductions to its donors. But, defendants have ruled that solely because of the Code's restrictions on legislative activities, Tax/Rep is not eligible to receive contributions which provide such tax deductions. 16. Plaintiffs do not have an adequate remedy at law. Each of them is irrepa- rably injured by the Code's restrictions on legislative activities, which prevent them from carrying out their charitable and educational purposes. Continued enforcement of the challenged restrictions will result in further irreparable in- jury to the plaintiffs. PAGENO="0111" 145 GROUNDS FOR RELIEF 17. The Code's restrictions on legislative activities unconstitutionally abridge the First Amendment freedoms of speech, association, and press, and the First Amendment right of petition of plaintiff Tax A/A, by conditioning the benefits of eligibility under the Code's charitable deduction provisions, and under the tax exemption, upon surrender of such First Amendment freedoms and rights. 18. The Code's restrictions on legislative activities unconstitutionally deny the equal protection of the laws and unconstitutionally abridge the First and Fifth Amendment rights and freedoms of plaintiff Tax A/A in that: a. The restrictions condition the enjoyment of tax benefits by plaintiff Tax A/A on the surrender of First Amendment freedoms and rights, while other organiza- tions similar in all pertinent respects to plaintiff may carry on substantial legis- lative activities without restrictions and still enjoy the same tax benefits, and b. The restrictions are based on impermissible distinctions of wealth and size because they permit legislative activities which are not a "substantial" part of an organization's total activities, and thus enable organizations subject to the re- strictions but having larger budgets and membership than plaintiff, Tax A/A, to engage in more legislative activity than plaintiff while still retaining their tax benefits. 19. The Code's restrictions on legislative activities unconstitutionally abridge the First Amendment rights and freedoms of plaintiff Tax A/A and its right to due process of law as guaranteed by the Fifth Amendment, in that: a. The restrictions-and specifically the words "substantial", "propaganda", and "attempting, to influence legislation"-are so vague that plaintiff Tax A/A cannot reasonably ascertain what activities are restricted, or the extent of the restriction, b. The restrictions confer unconstitutionally broad discretion on defendants. Defendants' decision to grant, not to grant, or to revoke tax benefits are based on administrative determinations as to the extent to which plaintiff Tax A/A will engage in legislative activities. Because these determinations are based on uncon- stitutionally vague criteria, plaintiff, who is subject to this enforcement proce- dure, is denied due process of law, c. The restrictions establish an unconstitutional prior restraint on activities protected by the First Amendment. This restraint arises because defendants may grant, fail to grant, or revoke substantial tax benefits based on defendants' deter- mination as to the extent to which plaintiff Tax A/A has or will engage in legis- lative activities, and d. The restrictions establish an additional prior restraint on activities protected by the First Amendment because the vagueness of the law forces plaintiff Tax A/A to engage in constant self-censorship, so as to avoid any activity that might cause the defendants to revoke plaintiff's tax benefits. 20. The Code's restrictions on legislative activities unconstitutionally deny the equal protection of the laws and unconstitutionally abridge the First and Fifth Amendment rights and freedoms of plaintiff Tax/Rep, in that: a. The restrictions preclude plaintiff Tax/Rep from obtaining substantial tax benefits solely because Tax/Rep has chosen to exercise its freedoms of speech, association and press, and its right of petition, and b. The restrictions deny eligibility to receive contributions which provide tax deductions to donors to Tax/Rep, while other organizations, similar in all perti- nent respects to plaintiff Tax/Rep, may carry on legislative activities without restriction and nevertheless receive contributions which provide tax deductions to the payors and/or donors. 21. For the foregoing reasons, the Code's restrictions on legislative activities are unconstitutional, both on their face and as applied. Wherefore, plaintiff pray: That this Court convene a three judge court pursuant to 28 U.S.C. Section 2284 to hear the merits of this amended complaint; That the three judge court declare the Code's restrictions on legislative activities null and void as violative of the First and Fifth Amendments to the United States Constitution; That the three judge court permanently enjoin defendants from enforcing the Code's restrictions on legislative activities; That the three judge court enjoin defendants from applying the Code's restric- tions on legislative activities when considering whether plaintiff Tax/Rep is entitled to the tax benefits accorded to other charitable and educational groups; PAGENO="0112" 146 That the plaintiffs be awarded their costs and disbursements, including rea- sonable attorneys' fees; and That the plaintiffs be granted such other relief as the Court deems to be just and proper. Respectfully submitted. BERLIN, ROISMAN & KESSLER, ANTHONY Z. ROISMAN, CLIFTON E. CURTIS. TAX ANALYSTS AND ADVOCATES, SAMUEL H. BLACK, THOMAS F. FIELD. OUTLINE OF COMMENTS CONCERNING TAX TREATMENT OF BUSINESS EXPENSES RELATING TO LEGISLATION (By Samuel H. Black, Tax Analysts & Advocates) SENATE SUBCOMMITTEE ON THE ENVIRONMENT, JULY 18, 1974 I. Does the tax system subsidize business lobbying? A. The corporation income tax is a net, not a gross, income tax. B. Deductibility of actual, directly-related `business expenses by business is simply the proper method for computing taxable income-not a tax subsidy. C. If lobbying and advertising are directly related to the generation of income, they should be deductible. D. Since Internal Revenue Code Sec. 162(e) (2) (B) disallows deduction for "grass roots" business lobbying, the Code penalizes rather than sub- sidizes business lobbying. Advertising and lobbying are exercises of the freedom of speech and the right to petition the Congress for a redress of grievances. II. Does the tax system penalize lobbying by public-interest groups? A. The charitable deduction, and tax exemption for charities, are true tax expenditures. These provisions have little to do with the computation of net income. B. Some charitable organizations are not only tax-exempt, are eligible for deductible contributions, but also may lobby to an unlimited extent. 1. Fraternal charities. 2. Veterans' organizations. C. Some charities are exempt and deductible and may carry one sizeable, but not unlimited lobbying. 1. Large public charities. D. Some charities are exempt and deductible but may carry on only minor ("insubstantial") lobbying. This category consists of small and medium- sized public charities. As compared to categorieS 11(B) and 11(C), the group of small public charities, including most environmental groups and all public interest law firms, is discriminated against in the ability to lobby. This discrimination is presently the subject of a lawsuit by Tax Analysts and Advocates. B. Some public-interest groups are tax exempt (but not eligible for de- ductible contributions) and may lobby to an unlimited extent. This cate- gory `consists of "Social welfare" groups, organized under `Sec. 501(c) (4) of the Internal Revenue Code, including such organizations as the Sierra Club, the ACLIJ, and the League of Women Voters. As compared to cate- gories 11(B) and 11(C), social welfare organizations are also discriminated against because of their legislative activities. (This issue is also raised in the lawsuit mentioned above.) F. Nevertheless, all these organizations may lobby at least to a small extent, and often to an unlimited extent, with tax-subsidized dollars. By contrast, as stated in I (D), above, business' legislative `activities are penalized by the nondeductibility rule for grass roots lobbying. III. Why single out business grass roots lobbying, which should be constitu- tionally protected, for penalty treatment? A. Populist view that corporations and big business are intrinsically evil. evil. B. Know-nothing view that lobbying is evil. C. View that the public can be fooled by advertising. PAGENO="0113" 147 D. In a dispute between different interests, one interest is often tempted to censor the other. IV. Vagueness in statutes can result in rights being placed in jeopardy; this statute is so vague as to be constitutionally suspect. A. The term "legislative matters" (Sec. 162(e) (2) (B)) is not self-defin- ing, and the regulations under Sec. 162, Regs. 1.162-20(c) (4), do not define this term. It is a fair assumption that there is no topic which is not (or could not be) considered by some federal, state, or local legislature each year~ Does this mean that no advertisements are deductible at all? B. This is a statute regulating speech. Is the statute specific enough to define exactly what is permitted, so that citizens will have clear notice of the law and of a "safe haven" of clearly permitted activity? C. Would a small business think twice before running an ad relating to a matter before a legislature? Doesn't this force taxpayers to censor them- selves? Does the statute chill the exercise of the freedom of speech and the right of petition? D. Could the statute's lack of clarity lend itself to selective harassment of political "enemies" since a business would not be able to cite any "safe- haven" tests to prove to the government (and to reassure itself) that deduc- tions were allowable? \T. If the present law is not to be changed, it could be letter enforced. A. The regulations should be lengthened and clarified, perhaps with ex- amples in a continuum from clearly deductible advertisements to clearly non-deductible advertisements. B. Coupons in ads, to be sent to legislators, taking a business-advocated position on a "legislative matter," could be prohibited. C. The regulations could include the name of a specific office in Wash- ington, to which citizen informants could mail "offending" advertisements on legislative matters, to be routed through channels to the appropriate enforcement office. D. Public interest groups could help enforce the law by sending in offend- ing ads to IRS and publicity demanding "informers' fees" if IRS enforcement led to a higher tax assessment. VI. When one class' constitutional rights are burdened relative to another otherwise similar class, the solution lies in expanding the liberties of the bur- dened class-not in burdening the favored class. A. The Congress could end one discrimination against public interest groups by repealing the lobbying and propaganda clauses in Sec. 501(c) (3) of the Internal Revenue Code (and related sections). B. This repeal would lessen the apparent disparity between business' and public-interest organizations' ability to participate in the legislative process. C. The constitutionally sound solution does not lie in the direction of cen- soring business advertising, nor does it lie in making business' access to the executive branch nondeductible. Senator HART. Our concluding witness is senior vice president of Georgia Power, Mr. Harold 0. McKenzie, Jr. STATEMENT OP HAROLD C. McKENZIE, JR., SENIOR VICE PRESI- DENT, GEORGIA POWER CO.; ACCOMPANIED BY FRANCES PLEDGER, ADVERTISING MANAGER; AND N. UNDERWOOD, GEN- ERAL COUNSEL Mr. MCKENZIE. I have with me Mr. Underwood, who is a member of the law firm who acts as our general counsel, and Mrs. Frances Pledger, our advertising manager. I have distributed to the subcommittee and staff the full text of my stat'~ment. In the. interest of time I will briefly summarize my testi- mony and then I will be happy to answer any questions. Senator HART. Thank you, very much. Let me order that it be printed in the record. Mr. McKENzIE. The Media Access Project, in testimony before this subcommittee on May 6, made a number of allegations against the 42-367-75-------S PAGENO="0114" 148 electric utility industry and several individual companies including the Georgia Power Co. The, crux of the allegations which have been di- rected against my company is that our advertising program-Or at least a portion of it-is "political propaganda" and therefore the costs of this advertising should be nondeductible for tax purposes and should constitute nonoperating expenses for ratemaking purposes. Any legislation-or administrative regulations-which would re- sult in the expenses of advertising of the type I will describe today being classified as nondeductible-or as nonoperating expenses-would seriously undermine the efforts of privately-owned utilities to cope with out national energy requirements. I have attached some exhibits to my prepared testimony which will enable the subcommittee to see our total advertising program in perspective. I have also set forth in the exhibits our company's media costs as well as our total advertising expenses. In 1973 we spent less than one-fifth of 1 percent of our total revenues for media and ap- proximately one-third of 1 percent of total revenues to `carry out our entire advertising and public information program. For a company involved in an industry as complex as the electric utility industry-to spend less than one-third of 1 percent of its revenues in a good-faith effort to communicate with its customers- investors-and the general public-simply can't be regarded' as ex- cessive or unreasonable under any criteria. The question is often asked: "Does an electric utility need to ad- vertise?" As with most short and simple questions-it's necessary to define the terms of the question before it has any real meaning. Obviously, whether "advertising" is an appropriate expenditure by a utility depends upon what is meant by the term. Perhaps a better way to state the question would be to ask: "Is it necessary and appro- priatè for an electric utility to communicate effectively with its cus- tomers and the investing public?" I submit to the subcommittee that if the investor-owned utility industry is going to survive and to supply this Nation with electric energy-it must continue to communicate with its customers and with the investing public. And these communications must be mean- ingful and go to the heart of problems which affect the industry oday-and the costs of these communications must contmue to be recognized as an essential operating expense. I'm sure that every member of Congress recognizes that to be in- volved in an industry involving energy in the 1970's is "a whole new ball game." In the electric industry we had two decades of price stability in the 1950's and 1960's when virtually every other industry experienced a steady increase in prices. But toward the end of the 1960's a number of forces interacted to change drastically the patterns of cost and price stability which utilities and their customers had enjoyed for 20 years. The underlying cause of the crisis which faces the electric utility industry today is growth. In the State of Georgia the consumption of electricity doubles each 7 years. This means that we have to double this size of our `plant each 7 years, as contraSted with an earlier figure used today of 71/2 percent nationally. This .is a 10l/2-percent annual growth of the combined rate. A public utility has a lawful duty t serve the needs of its service area. We don't have the option-during a .period of unusually high PAGENO="0115" 149 interest rates-of deciding to forgo expansion or delay it. We have & lawful responsibility to build generating facilities to serve the needs of the State of Georgia. In the next .3 years we must spend $11/2 billion for new construc- tion. Nothing illustrates the magnitude of our problems more clearly than the fact that yesterday our company was prepared to open bids on a $130 million bond issue-and $60 million of preferred stock-and for the first time in our history, there were no bids. This means that we now have to look for other ways to obtain this necessary long-term financing-and the cost of this capital is going to be very expensive. Who is affected by the cost of this capital? Not just the management and stockholders of the Georgia Power Co., hut every consumer of electricity in our service area. The increasing cost of capital is an example of `an economic fact of life which affects our customers in a very direct way, and we believe they have a right to he informed about these facts. We have used our advertising program to inform the public about the economic and technical realities which are changing this industry so dramatically-and we solicit the active cooperation of the public in copying with these problems. For example, we have devoted a significant portion of our advertis- ing program to encouraging energy conservation. We have explained billing options available to customers. We have explained our rate schedules including the seasonal changes in our rate structure. What we attempt to convey to the public is a sense of perspective regarding electric service. We have not overstated any of the problems confronting our company, nor have we consciously permitted our cu~torners to remain unaware of the problems which have increased our cost of operation and consequently our customers' rates for service. We believe dissemination-through advertising-of factual infor- mation indicating the nature and extent of future and present prob- lems of a financial nature affecting the company and its customers is good will or institutional advertising of the highest and most respon- sible order. Is this political propaganda?. Are we misleading the public in any way? Certainly not. I sincerely believe that we would be guilty of dangerously misleading the public if we remained silent during this period and did not inform our customers of the true circumstances of their supplier of electric energy. If the premise is accepted that the public has a right to informa- tion which affects them in a direct and meaningful way, the next question is whether it is appropriate to disseminate this information through the traditional advertising media? We have found that the use of our institutional and good will ad- vertising is by far the least expensive way for us to communicate. If we sent one individual item of information to each of our custom- ers. the postage cost alone would be more than $100,000. The Media Access Project contends there is something sinister about our advertising during a period in which we are involved before a regulatory agency. Apparently this argument assumes that a regula~- tor might be unfairly influenced by the advertising program. Every- one familiar with regulation knows that a regulatory proceeding lasts PAGENO="0116" 150 several months and involves thousands and thousands of pages of testimony. It is ludicrous to argue that a regulator who reads one of our advertisements conveying factual information about an economic issue would be unfairly influenced when he has been presented with days of testimony and hundreds of pages of data on that issue in a regulatory proceeding. It is an exercise in fantasy to pretend that a utility could sustain a meaningful communications program with the consuming and invest- ing public if it suspended its advertising program during the pendency of regulatory proceedings. Likewise, it would be absurd to modify the advertising program to omit references to the underlying circumstances facing the company which coincidentally may also be factors in the company's regulatory proceeding. In summary, public utilities are now deeply immersed in the eco- nomic and political crosscurrents of our society, in environmentalism, consumerism, uncontrolled inflation, and the energy crisis. I believe that the failure of a public utility to provide the public with information needed to see utility service in a reasonable perspec- tive would be a dereliction of our responsibility as a public utility. There can be no serious doubt that to change the current accounting treatment of advertising expenses of utilities would significantly re- strict the flow of information from utilities to their customers. This would be one more profoundly disturbing development in our industry and I urge the subcommittee to reject any suggestion which would tend to restrict rather than enlarge the public's right to know. Senathr HART. Thank you, very much. I won't give you a chance to respond to this because it would keep us here until late afternoon. But an almost throwaway line that you used, the experience on yesterday's market was it, or your efforts- Mr. MCKENZIE. Yes, sir. Senator HART. It is an item of enormous concern. And it should be to this committee and every committee of Congress. I know more than one utility in Michigan will have to scale down substantially its projected program because of the difficulty of getting additional- Mr. MCKENZIE. This inevitably means that at some point in time there well may not be enough capacity to meet the demand. Or more expensive short-term solutions will have to be solved. Mr. BICKWIT. I wonder if you, for the record, could give us an ex- ample of the kind of ad which should be included in FPC 426.4 and this treated as a below-the-line expense for ratemaking purposes. Mr. MCKENZIE. I think rather clearly, yes-well, I will give you a specific example. Several years ago there was quite a legislative battle in Georgia to enact what was known as the Territorial Service Act, which assigned the responsibility to the Public Service Commission to divide territory between municipal suppliers, cooperatives, and private utilities. Had we run an acT advocating a position on that particular legisla- tion, yes. that certainly would have been appropriate. Mr. BIcKwrr. Your statement speaks of your company's respon- sibility to keep its consumin~ and investing public informed as to the problems faced by Georgia Power in providing service. What kind of PAGENO="0117" 151 benefits do you see accruing to the company as a result of your ad- vertising campaign? Mr. MCKENZIE. Stated most briefly and most succinctly, our basic survival. At the time we are being faced with growth and inflation- producing compound problems for us, and I see no change on the hori- zon right now on either one. The price of electricity is going up just as dramatically there as it is anywhere else. And we have got to have the public willing to continue to accept us as a supplier if we are going to remain in business. Mr. BICKWIT. This is a question I should have asked of the repre- sentative from Shell, but couldn't find the ad at the time he was on the stand. We discussed the distinction between influence and educate. Senator Hart pointed out that there may not be, from a pure literal interpreta- tion, any distinction, in that education includes influence. But the language in the Shell ad said, "We urge most strongly that the type and form of the control be carefully considered to be sure that it will have the correct impact. It should not be a hastily enacted attack on the industry which would impose corporate excess profits taxes based on some arbitrarily chosen historical performance. Quite apart from whether this meets all the requirements for non- deductibility or deductibility, do you regard the words, "We urge most strongly" to be an attempt to influence as opposed to merely educate? And I should say we will seek a response to that question from the Shell witness as well. Mr. McKENZIE. Well, I came prepared to discuss our advertising and not Shell's. We have done no advertising falling in that category. So, I am really not competent to express any position on that. Mr. BICKWIT. That is fine. Thank you, very much. Senator HART. Does counsel want to take a shot at it? Mr. UNDERWOOD. No, thank you, Senator. Senator HART. Did either of you have anything you would like to add? Mr. UNDERWOOD. No, we ified a rather lengthy statement. Senator HART. Thank you, very much. [The statement follows:] STATEMENT OF HAROLD C. MCKENZIE, JR., SENIOR VICE PRESIDENT GEORGIA POWER COMPANY My name is Harold C. McKenzie, Jr. and I am Senior Vice President of Georgia Power Company. I appear today in response to a letter dated June 26, 1974, from the Chairman of this Subcommittee to the President of our Company inviting our participation in today's hearing. Senator Hart's letter indicated that the Committee is considering the "treatment of certain energy and environ- mental advertising expenses for tax and FPC accounting purposes" and made reference to testimony received on May 6, 1974, from attorneys representing Media Access Project alleging that the cost of some of the advertising consid- ered by the Subcommittee is not deductible under Section 162 of the Internal Revenue Code and has not been properly categorized for FPC accounting purposes. I have obtained a copy of the testimony submitted to the Subcommittee on May 6, 1974, by Harvey J. Shulman, Attorney with the Media Access Project, Washington, D.C. I will respond to the allegations made by Mr. Shulman against the Georgia Power Company, and while I do not purport to speak for the elec- tric utility industry generally, I am aware of the fact that the circumstances af- fecting our company today and the relationship between those circumstances and PAGENO="0118" 152 our advertising program are certainly not unique in the industry. Since the Chairman's letter did not invite comment relative to any specific legislative proposal, I will not comment on any specific pending legislation. However, if the Subcommittee's deliberations encompass consideration of specific legislation including S-2532, which is a proposed Amendment to the Federal Power Act, I would appreciate the opportunity to file a supplemental statement dealing specifically with the proposed legislation. The crux of Mr. Shulman's testimony is that certain firms in the energy-related industries are incurring expenses for advertisements which are either non-deductible under the Internal Revenue Code or should not be permitted as "operating expenses" for ratemaking purposes. REGULATIONS INVOLVED The Regulation which Mr. Shulman contends has been violated by certain en- ergy related companies is Treasury Regulation 1.162-20, the applicable portion of w-hich is set forth below: "Institutional or `good will' advertising. Expenditures for institutional or "good w-ill' advertising which keeps the taxpayer's name before the public are generally deductlble as ordinary and necessary business expenses pro- vided the expenditures are related to the patronage the taxpayer might reasonably expect in the future. For example, a deduction will ordinarily be allowed for the cost of advertising which keeps the taxpayer's name be- fore the public in connection with encouraging contributions to such orga- nizations as the Red Cross, the purchase of United States Savings Bonds, or participation in similar causes. In like fashion, expenditures for advertising which presents views on economic, financial, social or other subjects of a general nature, but which does not involve any of the activities specified in paragraph (b) or (c) of this section for which a deduction is not allowable are deductible if they otherwise meet the requirements of the regulations under Section 162." Reg. 1.162-20(a) (2). [Ojertain types of expenses incurred with respect to legislative matters are deductible under section 102 (a) if they otherwise meet the require- ments of the regulations under section 162 . . . All other expenditures for lobbying purposes, for the promotion or defeat of legislation . . . for political campaign purposes (including the support of or oppsition to any candidate for public office), or for carrying on propaganda (including advertising) relating to any of the foregoing purposes are not deductible from gross in- come for such taxable years." Reg. 1.162.20(c) (1). It should be pointed out that on pages 10 and 11 of his testimony, Mr. Shul- man has significantly misstated the applicable Treasury Regulation by setting forth excerpts from Regulation 1.162-20(b), which applies only to taxable years beginning before 1963. Regulation 1.162-20(c), set forth above, superseded the sections of the Regulation which Mr. Shulman quoted pertaining to taxable years beginning after 1962. For the sake of clarity, therefore, the record of these proceedings should note that the portion of the Regulation quoted in Mr. Shul- man's testimony on pages 10 and 11 is not applicable today. With respect to the treatment of advertising expenses for ratemaking purposes, Mr. Shulman contends that our Company has incurred expenses for advertising which should be listed as non-operating expenses in Subaccount No. 426.4 of the FPC Uniform System of Accounts, which Subaccount includes those expenses incurred for the purpose of influencing public opinion with respect to the election or appointment of public officials, referenda, legislation or ordinances (either with respect to the possible adoption of new referenda, legislation or repeal or modification of existing referenda, legislation or ordinances) ; ap- proval, modification or revocation of franchises; or for the purpose of in- fluencing the decisions of public officials . The advertisements of Georgia Power Company which the Media Access Proj- ect characterized as "political propaganda" do not fall within the category of "non-deductible" expenses for tax purposes or "non-operating" expenses of the Federal Power Commission and are in no way violative of the Regulations cited by the Media Access Project. Moreover, the promulgation of Regulations or the enactment of legislation which w-ould have the effect of classifying as non-deductible or as "non-operating PAGENO="0119" 153 expenses" those costs associated with advertisements of the type I will describe today would seriously undermine the efforts of privately owned public utilities to cope with our national energy requirements. GEORGIA POWER Co.'s ADvi~RTIsING PROGRAM In order for the Subcommittee to see our advertising programs in some reason- able perspective, I have attached some Exhibits which reflect our overall advertis- ing program for 1973. Exhibit A sets forth Georgia Power's total advertising outlays except for certain appliance advertising by the Retail Appliance Division of the Company which is not related to electric service. This Exhibit shows that the Company's total media costs for 1973 represent less than one-fifth of one percent of total revenues and that total advertising expenditures including salaries of all ad- vertising and public information personnel were approximately one-third of one percent of total revenues. Exhibit B reflects the division of our advertising program among various types of advertising messages dealing with energy conservation, environment, customer billing, technological developments, utility economics and other sub- jects. Of course, many of the advertising messages make reference to two or more of these topics in the same advertisement. Exhibit C 1 is a complete set of the Company's advertisements for 1973. I have included a complete set of the advertisements to accurately reflect the purposes, nature and tone of the advertising program when taken as a whole and I invite the Subcommittee's attention to the overall program as well as to the specific advertisements cited by the Media Access Project in its presentation of May ~, 1974. OBJEcTIvEs OF GEORGIA POWER Co.'s ADVERTISING PROGRAM In discussing the issue before the Subcommittee today, as it relates to Georgia Power, I believe it would be helpful for me to state in general terms the cir- cuinstances which underlie our Company's advertising program and to outline briefly the objectives which we seek to accomplish through advertising. The Georgia Power Company is a public utility corporation holding a franchise to 1)rOvide electric service in substantially all of the State of Georgia. Our retail rates and service are subject to the regulatory jurisdiction of the Georgia Public Service Commission. The Company is subject to the Federal Power Act and to the jurisdiction of the Federal Power Commission and numerous other regulatory agencies ranging from the Securities and Exchange Commission to the Atomic Energy Commission. I am sure that the members of the Subcommittee and Staff are quite familiar with the Public Utility concept. This is the concept which holds that regarding certain utility services, society is best served by private firms dedicating their property to public service under conditions of a natural monopoly in order for time public to obtain the benefit of high production levels and high levels of efficiency. Governmental regulation is, of course, the sub- stitute for direct market competition. Since public utilities have long been held to be "affected with a public in- terest," 2 such a company is accountable to the public to a much more mean- ingful extent than non-regulated firms. It would be naive for the management of our Company not to recognize that the public we serve constantly appraises our performance much more closely than it appraises the performance of coin- panies which provide a service in a directly competitive market. Our Company, like many other electric utilities, experienced a long period of retail price stability from approximately 1950 to 1970. In fact, we were able to implement a number of retail rate reductions during this period. This was due in part to the fact that generating plants grew in size and the accompany- ing economies of scale and a number of dramatic technological advancement made it possible for our Company to provide electric energy during these two decades on a descending cost curve. However, as the decade of the 1900s came to a close, a number of economic. technological and social forces interacted to drastically change the patterns of cost and price stability to which electric util- ities and their customers had become accustomed. The underlying catalyst which has affected our Company so dramatically in the 1970s has been the growth in demand for electric energy in our service area. 1 See p. 199. 2 Munn V. Illinois, 94 ITS. 113 (1877). PAGENO="0120" 154 The demand for electric energy in Georgia now doubles each seven years which, of course, means that the Company must double the size of its generation, trans- mission, and distribution facilities to accommodate this growth in demand. I would like to illustrate the kind of compounded economic realities which confront our Company because of this growth in demand for electric service. To install a coal-fired unit of generating capacity today costs more than one and one-half times what it cost in the late lOGOs. The current unit cost of in- stalling nuclear generating capacity is approximately three times the cost of installing coal-fired generating capacity. But the effect upon our customers of these increased costs is compounded by other economic circumstances of to- day. The capital which must be attracted from investors to build such plant is twice as expensive as was new capital ten years ago. For example, in January of this year, our Company marketed a $150 Million bond issue at an interest rate Of 85/s% whereas, in 1964 the interest rate on our bonds was 4~/8%. In addi- tion to these obvious economic realities of the 1970s, the commitment to environ- mental protection, a commitment which our Company shares, means that we are required to invest millions of dollars for equipment used solely for environ- mental protection. LAWFUL DUTY To SERVE One of the legal responsibilities which distinguishes a public utility from other types of business is the "duty to serve." Under our franchise as a public utility, our Company has a lawful obligation to take the steps necessary to provide the electric power which is demanded by the public in our service area. This distinction cannot be overemphasized in the context of the subject which is under consideration by the Subcommittee, and I would like to illustrate the practical application of this distinction by reference to a recent example in- volving another industry with which I am sure the Subcommittee is familiar. You will recall that in 1973, when most of the economy was subject to price regulation, the Cost of Living Council prescribed retail prices for beef at a level which many beef-distributing firms felt to be inadequate. A number of these companies simply announced that they would close down their packing facilities, which they did for a limited period of time. A public utility, regard- less of its view of the regulatory polices to which it is subject, never has the option of shutting down its operations nor the option of refusing to construct additional plants having the capacity to meet projected energy demands of Its service area. It is my strong conviction that this legal duty to serve carries with it a duty to communicate effectively with the consuming public which we serve as well as the investing public upon which we depend for capital to expand facilities in furtherance of our lawful duty to serve our customers. It is of crucial importance to the utility industry that the investing public, including those who comprise and support investment institutions, have a basic understanding of the principles of economics which are unique to this industry. We should never lose sight of the fact that a utility has NOWHERE to turn for capital for expansion except to the investing public, and if this source of capital is lost through a lack of public understanding of the utility industry, the only alternative is government financing and operation of facilities to pro- vide utility service. CONTENT OF GEORGIA POWER Co. ADVERTISING PROGRAM In view of the fact that our Company and our customers experienced the long period of price stability which I have described and have had this price stability upset by the economic and technological realities to which I have alluded, we have the responsibility to inform our customers of the implications of these developments. Therefore, we have devoted a substantial portion of our advertising program to encouraging energy conservation. We have used our advertising mes- sages to explain seasonal changes in our rate schedules as well as billing options available to customers. We have tried to give our customers an insight into the nature of the electric utility industry including the basic nature of the economic problems confronting it in the 1970s. Consistent with this approach of providing meaningful information to our customers, in a limited number of advertising messages we have indicated the nature and extent of economic problems that will confront the State of Georgia if our Company is unable to attract the capital necessary to carry out the minimum expansion program which will permit us to supply Georgia with its electrical needs. PAGENO="0121" 155 In short, what we attempt to convey to the public we serve is a sense of perspective with respect to our Company. We have not over-stated any of the problems confronting our Company and the electric utility industry; nor have we consciously permitted our customers to remain unaware of the profound and vexing problems which drastically have increased our cost of operation and, consequently, our customers' rates for service. The dissemination, through advertising, of factual information indicating the nature and extent of future and present problems of a financial nature affecting the Company and its cus- tomers is "good will" or "institutional" advertising of the highest and most responsible order. In the advertisements which the Media Access Project has labeled as "prop- aganda" we convey the simple truth that the retail price for electric service in our area will increase, and we indicate why. Is this political propaganda? Is it political advertising, or an attempt to influence legislation? Certainly not. It is an effort to convey the practical implication of facts known to the Company's management which, in all probability, are not known to our customers. There are multiple pragmatic reasons for this. For example, if a customer is contemplating the construction of a new home to be furnished with all electric appliances, we believe we have an obligatLon to inform him that any estimates he obtains relating to operating costs for these appliances must be based upon the realiza- tion that rates will increase Furthermore, basic notions of fairness strongly suggest to us that the customer has the right to know that his electric bill is about to increase. Advertising is by far the least expensive way for us to convey this message. If we sent an individual item of information to each of our custom- ers through the regular mail, the postage cost would be more than $100,000. The total media expenditures during 1973 for the advertisements which Mr. Shulman has questioned were approximately $39,000. Mr. Shulman characterizes these particular advertisements as "political prop- aganda" because, during certain periods of time in which these advertisements were included in our advertising program, our Company was involved in rate adjustment proceedings before a regulatory agency. Mr. ~hulman implies that there is something sinister about communicating with our customers in the manner of the specific advertisements which he cites and at a time in which a legal proceeding involving a rate adjustment was in progress. I can think of nothing more fundamental to the survival and well-being of the electric utility industry than the free flow of information of the kind that I have described, and efforts to communicate along these lines with the public would be totally ineffective if they could be implemented only during periods of time in which a company is not involved in legal proceedings concerning rate matters. During a period of inflation when periodic rate adjustments are essential to survival and in a period in which regulatory rate proceedings are highly complex and require many months to conclude, it is an exercise in fantasy to pretend that a utility could sustain a meaningful communications program with the consuming and investing public if it suspended its advertising program during the pendency of rate proceedings. Likewise, it would be absurd to modify the advertising pro- gram during rate proceedings to omit references to the underlying circumstances facing the Company which coincidentally are also factors in the Company's request to the regulatory agency for authority to adjust rates. The pricing interface between a utility and its customers is a tariff or rate schedule wh~ch is filed with the appropriate regulatory agency. Such a rate schedule is necessarily complex, and when there are seasonal or structural modi- fications in our rate schedules, we have a definite obligation to inform the public we serve in a direct and effective way of the substantive changes in these rate schedules. Another example of the practical value of informational advertising with respect to a regulatory proceeding is a billing practice which the Georgia Public Service Commission has approved for our Company, known as "levelized billing." Because of the widespread growth of air-conditioning in our service area, a typical customer pays significantly more for electric service during the summer months than he does for service during the winter. Recognizing that this disparity of monthly electric charges creates a hardship on some family budgets, we asked the Georgia Public Service Commission to authorize "levelized billing." Under this procedure, an estimate of the customer's total annual bill is made based upon his billing history; and the customer is permitted to make averaged monthly payments based on annual use and their accounts are reconciled annually as to overpayment or underpayment. We alerted our customers to the availability of "levelized billing" and explained its operation through our advertising program. PAGENO="0122" 156 I cannot overemphasize my sincere belief that electric customers are entitled to know when they will experience rate increases and what are the bases for rate adjustments. For illustrative purposes, let us assume that an electric utility has chosen to inform its customers of an impending energy shortage and the need for reduction in the level of consumption of electricity by customers. Let us assume further that, despite the customers' heed to the plea by the electric utility to reduce consumption, their electric bills increase for the next several months. Naturally, the customers would be highly confused by the fact that their usage of electricity bad been reduced and still their electric bills continued to increase. What the utility customer in the above example would not fully understand, however, was that the energy crisis was the catalyst that effected the changes in the entire economic structure of our society. In other words, economic theory is closely analogous to theories in other specialized fields-to-wit, any single action which causes changes in a complex system will invariably affect the whole.3 Thus, in my example, the energy shortage caused the rising costs of all fuels. This in turn necessitated what is known in the electric utility industry as the "fuel adjustment clause." This is a device which, when approved by a regulatory agency, permits the utility to pass on to the customer the increased cost of fuel on a month-to-month basis without having multple full-blown rate increase pro- ceedings. Without this explanation of the need to increase rates with a simulta- neous need to reduce consumption of electricity, the customer's understanding of the overall economic picture is reduced to an emotional response to his economic plight. Consequently, the consumer of electricity must understand the need for higher rates or he will be unable to make a rational decision as to the efficacy of such an increase. Should this misunderstanding lead to the utility's inability to obtain a "fair return," then investors who put up some 80% of the capital each year to expand systems such as ours will invest elsewhere. When capital flees, construc- tion must slow drastically. Moreover, if the remaining construction cannot satisfy demand, then many sacrifices must be made by the utility and by the public in general. Advertising is a utility's one consistent way to present facts to the public. Interfering with an advertising program can hardly be done without sacrificing a well-informed public for one which is ill-informed. In sum, I submit to you that, as my aiove example illustrates, a public utility must inform its customers of all relevant economic factors pertaining to the utility's present and future needs in order to fulfill its obligations to those citizens whom it serves. THE DANGERS OF CLAssIFYING ADVERTISEMENTS AS "POLITICAL" IN NATURE The Media Access Project has utilized circular reasoning in characterizing three of our advertisements as "political" and contending that expenses for these advertisements should be classified as non-operating expenses. In his testimony before this Subcommittee, Mr. Shulman frankly acknowledges that Georgia Power Company's advertisements which refer to rate adjustments are not of such char- acter as to render the monies expended therefor non-deductible for tax purposes. On page 24 of his testimony, Mr. Shulman asserts that, ". . . if the rate increase controversy seems far removed from a legislative forum and is confined to state utility commissioners or courts, a strict reading of the current IRS regulations would seem to permit deductibility." However, Mr. Shulman contends that such ads represent non-operating expenses, and he cites as support for this thesis the fact that the Federal Communications Commission in 1973 directed two Georgia television stations to "afford opportunity for the presentation of contrasting views on the rate increase issue." I would like to illustrate the circular reasoning which Mr. Shulman has employed to arrive at his conclusion. In the FCC proceeding referred to, the Media Access Project was representing a group known as the Georgia Power Project. The Georgia Power Project is a Note the biological theory known as "Harding's Law." which holds that "You cannot do only one thing"-that Is, any one bIological change In a biological system will affect the enthe system. PAGENO="0123" 157 small group of individuals whose spokesmen publicly acknowledge that the Project's primary goals are the political objectives of the ultimate replacement of capitalism with socialism and that the group believes that the first step in this process is to undermine confidence in public utilities and to achieve total public ownership of utilities.4 While publicly acknowledging these ultimate goals, the Georgia Power Project has sought to politicize virtually every public statement and position which our Company has taken in recent months. For example, in its advertising program the Company has made the simple factual observation that it must expand its physical plant because the demand for electric energy will continue to increase. The Georgia Power Project has sought to politicize such statements by simply proclaiming that they constitute propaganda intended to increase sales and profits. The Federal Communications Commission, without purporting to pass upon the correctness or incorrectness of our Company's ad- vertising program, directed two Georgia television stations to do more than they previously had done in providing opportunity for contrasting views concerning ~ur rate proceedings. Ironically, the Media Access Project now points to the FCC case as evidence that the subject advertisements are politicaL In reality, any political connotation which the advertisements may have acquired has been the result of public statements of a political nature by Media Access Project's client in the FCC proceeding, Georgia Power Project. It is patently obvious that in the case of a group with political goals as broad as those of the Georgia Power Project (such goals being to replace capitalism with socialism), virtually any informa- tional message of substance could be politicized by publicly proclaiming that it is inconsistent with the political goals espoused by such group. In illustrating the circular reasoning of the Media Access Project I want to make it clear to the Subcommittee that I am in no way quarreling with the full rights of the members of the Georgia Power Project to criticize capitalism, the private ownership of utilities, or the Georgia Power Company in particular. In fact, I have participated in many television and radio discussion programs in Georgia with members of the Georgia Power Project and I fully respect their rights *to articulate their political and economic philosophy. But the point I want to emphasize is that merely because a group such as the Georgia Power Project takes issue with information conveyed in our advertising program, that does not change the essential character of our advertising program from being ~ne of an informational character to one that is political in nature. In a real sense, the acknowledged public efforts of a group of individuals bent upon radical economic change and to undermine public confidence in a particular in- dustry or company makes it all the more crucial to the continued well-being of the Company that it have useful and effective channels of communication with the public it is franchised and obligated to serve. In summary, public utilities are now deeply immersed in the economic and political cross currents of our society, in environmentalism, consumerism, un- controlled inflation, and the energy crisis. I believe that the failure of a public utility to provide the public with information needed to see utility service in a reasonable perspective would be a dereliction of our responsibility as a public utility. It is axiomatic that these complex realities do not have a discrete ex- istence apart from the factors weighed by a regulatory agency in a proceed- ing for a rate adjustment. To seize on this fundamental truth as a basis for characterizing substantive utility advertising as "political propaganda" is to play a dangerous semantical game. It is obvious to me that if the electric utility industry is going to serve the public interest, it must make use of more rather than less sophisticated communications with its customers and with the public in general. I respectfully ask that this Subcommittee not entertain the type of impractical and punitive recommendations presented by the Media Access Proj-~ ect. I strongly urge that this Subcommittee recognize the right and the obliga- tion of a business to inform its customers, as well as the right of the customers to be so informed. See Transcript of Georgia Public Service Commission Docket No. 2465U and materials discussed therein. PAGENO="0124" 158 EXHIBIT A Total Year Gross revenue sales of electricity Institutional advertising media costs Institutional media costs cents per gross revenue dollar advertising expenditures including all salaries, expenses and marketing advertising Total advertising cents per gross revenue dollar 1971 1972 1973 1974' 1974s(January-May) $417,696,151 $506,058,516 596,777,465 752,776,660 282,086,034 $1,034,772 947,993 1,057,267 1,600,214 391,936 .24773 .18733 .17716 .21257 .13894 $2,154,757 1,876,794 2,013,623 2,968,220 784,426 .51587 .37086 .33742 .39430 .27808 11974 budget. 2 January-May actual. EXHIBIT B 1973 advertising media expenditures by subject matter: Amount Conservation of energy `$215,218 Utility economics 2 324, 211 Environmental information 398,270 Security lighting 4 14,666 Other customer information a 162, 147 Total 814,512 1 Ads giving factual tips for residential customers on how to conserve electric energy. Examples: "How does 73 differ from 78?" and "Please. Turn it down when you're leaving." 2 Ads giving basic economic facts about utility operation. For the 3 advertisements-i radio, 1 television, i newspaper- attached to Senator Hart's letter, referred to in Mr. Shulman's testimony before the subcommittee, media costs were $39,536. 3 Ads explaining company programs for environmental protection and conservation of natural resources. Examples: "The Chattahoochee River is cleaner this year" and "The Etowah" television spot. 4 1 television commercial on night street lighting. 5 All ads are informational in nature, but this category includes those which give information not specifically related to preceding categories. Examples: "Plan. The plant." and "High temperatures may cause a spurt in your electric bill." Senator HART. This concludes the testimony scheduled on the subject matter. I never was a tax man. I have inhaled enough of this testi- mony, though, to have the feeling that there are differences in degree at least, in the several ads that have been presented, and the earlier testimony, whether any of them are of such character as should be treated under the Code as not deductible, I don't know. I am sure many people have strong opinions. But I think the responsibility of that is simply to refer to the Bureau the record, and indicate to them that. we will expect them to make the judgment which they are qualified to make and which I am not, and as to the treatment that should be accorded each of the several ads. Mr. Bickwit reminds me that there was some question with respect to the treatment above and below the line on accounting under the Federal Power Commission Act regulations, and I am even less in- formed in that area. All I can do is send the transcript to them to make that judgment. Thank you very much. I am sorry we have held the witnesses for so long. [Whereupon, at 1 :27 p.m., the hearing was adjourned.] PAGENO="0125" ADDITIONAL ARTICLES, LETTERS, AND STATEMENTS MOBIL OIL CORPORATION, New York, N.Y., February 22, 1074. Hon. PHILIP A. HART, Chairman, Subcommittee on Environment, Senate Commerce Committee, U.S. Senate, Washington, D.C. DEAR SENATOR HART: This is in response to your letter of January 28, 1974 to Mr. William P. Tavoulareas, requesting information with respect to Mobil's aidvertising. Samples of some advertisements characterized as "public service" advertising are enclosed with your letter. You also state you would be happy to receive copies of any of our other advertisements which we feel are particularly informative. In addition, you request the following specific information about Mobil's advertising efforts. I. INFORMATION REQUIRED UNDER PARAGRAPH (~) Under paragraph (a) of your letter you request the following: "How much money did your company spend on all advertising in 1973? "(1) Please break this down into product/service, goodwill (i.e., institu- tional), political (i.e., non-deductible as a business expense under IRS Regulation 1.162-20(c) (4)) advertising. "(2) Please break this down for each medium (i.e., television, radio, newspapers, magazines, pamphlets and brochures, other) ." 1. Total advertising e~vpenditure in 1.973 Mobil spent $16.2 million on all advertising in 1973. This does not include amounts spent by affiliates of Mobile for advertising outside the United States. 2. Breakdown A breakdown of Mobil's advertising expenditures is shown on Attachment A. ATTACHMENT A, MOBIL OIL CORP.-1973 ADVERTISING EXPENSE (U.S.) [In thousands of dollarsj Tele- vision Radio News- papers Pam- phlets and brochures Maga- zines and trade publica- tions Other Tota Product/service: NAD 3, 007 659 Chemical 1,232 117 Total 4, 239 776 Goodwill: Corporate 5,232 Nondeductible: Corporate 208 Total 9,471 984 309 17 573 1, 598 1,160 276 99 6,422 2,625 326 799 411 573 36 41 2, 758 215 169 375 9, 047 6,282 829 1,536 650 3,142 375 16,158 II. INFORMATION REQUESTED UNDER PARAGRAPH (b) Under paragraph (b) of your letter you request the following: "What does the company consider to be public service advertising? "(1) Is such advertising limited to goodwill (i.e., institutional) advertis- ing, thus excluding product/service and political advertising? (159) 42-367 0 - 75 - 9 PAGENO="0126" 160 "(2) How does the company consider each of the advertisements attached to this letter-as product/service, goodwill (i.e. institutional) or political (i.e. non-deductible) advertising?" 1. "Public $ervice" Advertising The concept of public service advertising is contained in a longstanding Treasury regulation now appearing as Reg. ~ 1.162-20(a) (2). Under such regu- lation, "expenditures for institutional or `goodwill' advertising" are generally deductible. The regulation provides more specifically that "a deduction will ordinarily be allowed for the cost of advertising which keeps the taxpayer's name before the public in connection with encouraging contributions to such organizations as the Red Cross, the purchase of United States Savings Bonds, or participation in similar causes. In like fashion, expenditures for advertising which presents views on economic, financial, social or other subjects of a general nature" are deductible provided they do not include expenditures for labbying purposes, for the promotion or defeat of legislation, for political campaign purposes or for carrying on propaganda (including advertising) relating to any of the foregoing purposes. It might be useful at this juncture to illustrate samples of advertisements that Mobil has been advised constitute institutional or goodwill advertising, as well as non-deductible advertising which might be considered to border on a potential purpose for the promotion or defeat of legislation. In assisting Mobil accurately to characterize its advertising for purposes of preparing its tax re- turns, Mobil has instituted a program under which all of its advertising is sub- mitted to outside counsel uiTder instructions to adopt the most conservative, stringent test against Mobil in determining deductibility under the statute, regu- lations and case law on this subject. For your convenience, there is enclosed a complete set of 1973 newspaper and periodic public service advertisements divided into four groups, the first three of which we believe and are advised constitute institutional or goodwill advertis- ing. Group IV contains advertising which we believe to be in the public interest but which contain sufficient legislative potential to be regarded by ourselves and outside counsel as possibly falling in the non-deductible category, and are there- fore treated as nondeductible for tax purposes. Group I consists of ten advertisements of the "Red Cross" variety. Four ("Nine o'clock Scholar", "Oedipus Wrecks", "Great Plans . . ." and "Masterpiece Theatre Invites") relate to the Masterpiece Theatre Mobil-sponsored program on pub- licly-supported Channel 13 in the New York viewing area. The remainder in this group relate to the New York Public Library, the New York City Parks Admin- istration (Concert, Opera and Theatre program), the Mobil Harlem National Professional Summer Basketball Championship, American Museum of Natural History's West Side Day, British Theatre Season in Brooklyn and a Christmas note to the Skylab astronauts. Group II consists of 12 advertisements, ten of w-hich deal with ways of con- serving gas while driving; one deals with driving safely; two relate to con- servation of fuel in the home and one deals w-ith lighting in general. Group III covers a broad socioeconomic field comprising some 15 advertise- ments, some dealing with technology in general, an architect exhibit, Middle East peace, New York drug law, conservation efforts, monopoly and capitalism. Group IV, the non-deductible category, covers a variety of subjects including a number of advertisements grouped under the general category of "the $66 bil- lion mistake" relating in part to regulatory policies on antipollution control, and general information on the energy shortage. There are some 23 advertisements or brochures in this group. While none of these, in the opinion of counsel, is clearly PAGENO="0127" 161 non-deductible, no absolute assurance can be given by counsel that a deduction would be upheld and therefore, as noted above, this group of advertisements is treated by the Company as non-deductible. 2. Specific request under 11(b) (1)-Is such advertising limited to goodwill (i.e., institutional) advertising, thus eo~clucling product/service and political ad- vertising? The answer to this question is largely illustrated by a Mobil news release published as an advertisement in The New York Times on July 29, 1973 (en- closed as Attachment B). In such release, Mobil announced that it was discon- tinuing its gasoline advertising and would redirect its efforts! towards broad public service and public information programs. Mobil also published an adver- tisement in The New York Times on July 12, 1973 (Attachment C) listing the headlines from illustrative advertisements. Thus, Mobil has shifted away from product/service advertising to advertising which contributes to public awareness or understanding of a variety of socioeconomic topics, some of which may border on the "political" as noted in Group IV above. Mobil views all of the advertise- ments submitted herewith as public service advertising, although expenditures for the Group IV advertisements are not deducted. 3. Specific request under II (b) (2)-Treatment of advertisements attached to letter of January 28, 1974 All of the advertisements, except one, attached to your letter of January 28, 1974 are regarded by Mobil as in the Group IV non-deductible category. Many of them were 1973 advertisements that are shown in Group IV described above. Some of the 1972 advertisements were not repeated in 1973. One advertisement in particular, namely, "An Open Letter on the Gasoline Shortage to: [named senators and representatives]" was the first advertisement submitted to outside counsel who confirmed Mobil's own views that such advertisement, however in- formational, touches closely on legislative subjects and should therefore be treated as non-deductible. The one exception to the non-deductible category in the enclosures to your letter is the advertisement entitled "The Lady Was Listen- jag" which, on advice of counsel, is considered as deductible institutional advertising. If you have further questions or requests for information that may be of assistance to the work of your Subcommittee, we would be pleased to respond and cooperate to the best of our ability. Sincerely yours, HERMAN J. SCHMIDT. Enclosures. ATTACHMENT "B" MOBIL OIL CORPORATION, New York, N.Y., June 21, 1973. Mobil Oil Corporation today announced it is discontinuing its gasoline adver- tising, including its "Mr. Dirt" television and radio commercials. The company said it would redirect its efforts toward broad public-service and public-information programs covering the conservation of gasoline and specific suggestions on more efficient use of available energy. "The American public must develop a new national ethic with respect to the use of energy," Mobil Chairman Raw-leigh Warner, Jr. said. "We as a nation must adopt long-term approaches to conserve energy, because the energy shortage will be with us for some time." IThis ad appeared in the New York Times on June 28, 1973] PAGENO="0128" 162 ATTACHMENT "C" Ou~ Is PRECIOUS. LET'S NOT WASTE IT. March, 1972 THE GAP. May, 1972 EVEN IF YOU HAVE MONEY To BURN, You SHOULD SAVE ENERGY. June, 1972 THE UNNATURAL GAS SHORTAGE. September, 1972 ENERGY POLICY Is PRIORITY POLICY. November, 1972 ENERGY Is INDUSTRIAL PLASMA. December, 1972 Is ANYBODY LISTENING? January, 1973 So MUCH TO Do, So LITTLE TIME. March, 1973 YOU'VE HEARD GASOLINE Is SHORT. HERE ARE 8 WAYS To GET ALONG. April, 1973 LET THERE BE JUST ENOUGH LIGHT. May, 1973 BECAUSE THAT'S WHERE THE OIL IS. June, 1973 These headlines are from some of the ads on energy problems we've published in the past year-and-a half. So when people ask us why energy shortages have takea us by surprise, we tell them we're not at all surprised. Just sorry. For reprints of any or all of these messages, write Room 646, 150 East 42nd Street, New York 10017. PAGENO="0129" 163 N~r~ o'c~©th ~c~©~©r Sunday evening at nine, a Victorian classic becomes thoroughly engaging television when the Masterpiece Theatre dramatization of Tom Brown's School Days begins on PBS. Channel 13 in New York. The story, as you probably know, deals with a young boy's adventures during his first years at Rugby in the 1820s. Atop hat and frock coat are the classroom costume, but don't let that fool you. The curriculum is plenty tough, and so is the ragging by upper-formers. Tom takes a lot from that bully Flashman. He's a plucky tyke, though. He per- severes. And, needless to say, he winds up the better man for it. Tom Brown's School Days is fine entertainment, produced with the regard for quality that continues to set these Masterpiece Theatre productions apart from so much other television. We share that regard. We've been getting high marks for quality these past 106 years ourselves. See truth and bravery triumph. See Tom Brown win out. Be in your seat, and quiet, when the bell rings on Sunday at nine. GROUP I © Mobil Oil Corporation PAGENO="0130" 164 01973 Mobil Oil Co~po~otoo Maggie Verver is so devoted to her widowed father that even after her mar- riage, and motherhood, the two con- tinue to see each other almost as much as ever. That is how master novelist Henry James heads Maggie's marriage for the rocks in The Golden Bowl. Before long, Maggie's marriage seems wrecked. Her best chum, Char- lotte, is in love with Maggie's husband. Charlotte also happens to have wed Maggie's father. Life is a tangle. Masterpiece Theatre sorts it all out in six episodes beginning Sunday at 9P.M. on PBS. That's Channel 13 in the New York area. Pull up a couch and tune in. You'll enjoy some of the finest television any- where, adapted from one of the most penetrating psychological novels of any period. O~d~pus Wrecks This ad appeared in the New York Times on March 22, 1973. PAGENO="0131" 165 Th~r~a cr~ ~ ~s soon cs h~s d~cd~ Who realty knows you're you? That's the tife-and-death question in The Man Who Was Hunting Himself, a Masterpiece Theatre mystery that starts Sunday evening at nine on PBS-TV. This is a puzzler for the thinking mystery fiend. it's a drama of impersonation, espio nage, murder. It's satin today's Europe. It could be straight out of today's headlines. Join hostAlistair Cooke Sunday at nine for Part I of a first-rate thriller Like the Peter Wimsey whimseys, which wilt return in December, this three-episode chiller is made possible by a grant from M©bH 1910 MobiiO,! Cp~~'atk~~ PAGENO="0132" 166 ~w1 ~ Y©U ~© s~? o~ii ~ ~ o~ your ~ thdr~ A Masterpiece Theatre mystery is literate mystery A whodidit. And no less suspenseful for that. You'll see, when the Masterpiece Theatre Mystery Season opens Sunday, October 7, at 9:00 P.M. on PBS-TV That's Channel 13 in the New York viewing area. Be in your chair, ready to watch supersleuth Lord Peter Wimsey's well-bred way with murder in Dorothy Sayers' Clouds of Witness. This is the third Masterpiece Theatre season made possible by a grant from Mobil. The quality hasn't changed. Only the plots have changed, to mystify the innocent. PAGENO="0133" 167 ~©r~7pg© OT~Ir~J ~ ~ ©~ ~ ~ Monday through Friday, next week, the New York Public Library's Donnell Library Center at 20 West 53rd Street will turn its large and comfortable auditorium into a theatre so you can enjoy some of the finest art films you're likely to see anywhere. The films will be screened at 4:00 P.M. and 6:00 P.M. on Monday, Tuesday, and Thursday. On Wednesday at four, there will be a special program for children. The six o'clock film that day is a special for adults-a gorgeous look in color at Java's Borobodur temple. We don't have room here to give you the week's schedule. Bütwe can tell you it includes films on Gauguin, Edward Munch, Jackson Pollock, Eskimo art, and a lot more. Best thing to do is stop in at the Don nell between now and Monday for the complete program. It's all free to the public. Of course, it costs the Don nell money, and we were happy to help with some of what was needed. Go to a movie at the library for a nice way to end the day. This ad appeared in the New York Times on June 7, 1973. PAGENO="0134" 168 C1973 M~b4IOi~Copô~ation J~JT~jy y~~j ~ ~ LI \taV ~)~`J Ii ~ ~ ~ ~hc~i~ You can't get tickets to some of New York's very best shows because they're free. In city parks you can see opera, watch a frisbee fly-in, enjoy poetry readings, attend dance festivals, listen to concerts by the Philharmonic, see a Metropolitan Opera performance, watch Shakespeare. All free. The New York City Parks Administration wants to remind you that this great entertainment and a lot more is available. And that you find out when and where by calling (212) 472-1003 any day of the week from 10 in the morning until eight in the evening. Parks people at that number will cheerfully tell you about all the superb attractions you can't get tickets for. We happen to know about one of the nicest. A visit to Summergarden, at the Museum of Modern Art, is a tranquil way to spend a weekend evening. (A grant from Mobil Foundation makes Summergarden possible.) * There's plenty more all over the city, though. Call 472-1003 to find out about it. That's the ticket. This ad appeared in the New York Times on July 5, 1973. PAGENO="0135" 169 This ad appeared in the New York Times on August 23, 1973. Tiny Archibald. Julius Erving. Dean Meminger. Artis Gilmore. Bob Love. The na- tion's greatest pro basketball stars playing for a great reason: to support sports and education programs for youngsters in New York and other cities. Mobil underwrites the costs of the three-day tournament that pits pros against neighborhood hotshots. We also provide a $2,500 scholarship, and a trophy for the victors. The tournament begins Friday, August 24th, at Mahoney Gymnasium, City Col- lege of New York, 138th Street and Convent Avenue. Proceeds from ticket sales go to the youth programs. Get your tickets today at any Ticketron' outlet or at any of these locations: 1-lar- em Professionals, Inc., 2123 Seventh Avenue; Appletown Sporting Goods, 2489 Seventh Avenue; and Small's Paradise, 2294 Seventh Avenue. Or you can pick up tickets right at Mahoney Gymnasium. PAGENO="0136" 170 ~ I~ ~j~;~j ~ EL~©Jy This Saturday the American Museum of Natural History will hold its fourth annual West Side Day. Last year, 34,000 friends of the museum from all over the city dropped by. Some activities they enjoyed included making Masai jewelry and sculpting dinosaurs out of clay. This year, 100 community groups will set up exhibits and information desks throughout the museum. West Side Day gives the city a befter understanding of what a wonderful resource the museum is. The museum's knowledge of the community grows, too. We've been friendly with the museum since the early 1940's when Mobil became involved with its Department of Inverte- brate Paleontology. The collection of micro-fossils there is in- valuable to anyone concerned with oil and gas; and the Micropaleontology Press, which Mobil helps finance, provides information on micro-fossils to universities and business scien- tists throughout the world. That's our business interest. But we like West Side Day because it's a great way to spend a September Saturday. We hope New York families agree. And we hope other cor- porations will consider how they might help support the American Museum of Natural History Whether you want to reach the museum for fun or with funds, it's at 79th Street and Central Park West. Seeyou Saturday. This ad appeared in the New York Times on September 27, 1973. PAGENO="0137" 171 © 1973 Mob~I O~t Corporator, ~ Think of it: A British Theatre Season in Brooklyn. The Royal Shakespeare Company. The Actors Company. The Young Vic. Three of the worlds truly great troupes. In repertory, in Flatbush. This spectacular season opens at the Brooklyn Academy of Music on January 9, with the Royal Shakespeare Company doing Richard II. It continues to late April; and, aside from the bard, offers work by Chekov, Piath, Congreve. Brooklyn's British Theatre Season has to be one of the most extraordinary theatre events anywhere. We congratulate the Academy of Music for puthng it all together. Tickets are reasonable (they start at $3.50), and available at the Academy's Box Office at 30 Lafayette Avenue as well as at A & 5, Bloomingdale~, and Ticketron outlets. If you enjoy the King's English, you'll love Brooklyn's British Theatre Season. And you'll thank Brooklyn for giving you the bard. PAGENO="0138" 172 ~~my CC~1~m©~ Jc~Ty9 ~ ~UD © 1973 Mobjl 01 Corpor~on Sorry the three of you can't be home for the holidays. Not that you are the first, of course. It's been that way down through the ages. Most of us sit home by the fire, while a few are off on far voyages of discovery Jason and his Argonauts, seeking the Golden Fleece. Magellan pressing across the vast Pacific. Or Darwin, cataloging a newfound insect on some bleak Galapagos island. Skylab is all of these. Skylab is questing for treasure, navigating the unknown, gathering scientific evidence. How delighted Darwin would have been with the thou- sands upon thousands of photographs of the sun, the earth, the stars, and that heavenly visitor Kohoutek. * Magellan, perhaps, would have been trans- fixed by the sight of the earth-a huge sphere floating in space, as a handful of his men proved for all time. And what of Jason? Could he perceive that his Golden Fleece was but a bauble compared with the treasure Skylab and its crew will bring backforallof us? The treasure is the golden sun itself. The crews of Skylab have collected more detailed in- formation about the sun than man has amassed mall history Leave aside the galactic theories that have been warped and recast by the new voyages of discovery. Man has learned to live and work in space. He can loft all kinds of equipment and machinery into orbit, and keep itfunctioning. He can repairand maintain apparatus for converting sunlight into electricity, or set a delicate sail to trap the solar wind. From beyond the haze and distortion of the atmosphere he can take photo- graphs by the hundreds of thousands, record his observations, conduct experiments. Electric power generated by solar energy will not be a practical, large-scale reality soon. Certainly not in time to meet the problems of this decade. But one day. all the new knowledge and skills will come together in a project to capture the sun's energy for the use of man. Clean, abundant, economic energy for the people of all nations. Perhaps the mechanism will be a series of orbiting solar traps that beam energy to earth along microwave or laser beams. Perhaps it will be an earthbound process for converting solar heat into electricityon a massive scale. Whatever the method, whenever it comes, it will be based in no small measure on the knowledge and skills contributed by the crews of Skylab. So Merry Christmas and thanks, Bill Pogue, Ed Gibson, and Jerry Carr. Have a good voyage and a safe homecoming. PAGENO="0139" 173 GROUP II G1973 Mobi Od Corpo~'on ~:~~fl~jf c:~: ~ ~ ~ We mean the energy crisis. You can help keep the gap between energy supply and energy demand from getting worse by handling your car in ways that conserve gasoline. While you're at it, you'll save some money, extend the life of your engine, cut down tire wear, and reduce pollution. Here are some pointers from Mobil's research and technical people. * The slower you drive, the less fuel you use. It costs nearly 50 percent more to cruise at 80 than at 50. And at 50, about 11 percent less fuel is used than at 60. *With a manual transmission, shift from lower gears as soon as the engine will run smoothly in the higher gear. *Aim far down the roadway when you drive, and let the car slow itself approach- ing a traffic signal. You'll save on gasoline and your brake linings will last longer. * Gaugethe traffic lights ahead of you so you have to stop as seldom as possible. *Use low-viscosity oil in the engine, transmission, and rear axle. Heavy lubri- cants cause unnecessary friction. * Keep your car tuned. An engine out of tune can easily burn 25 percent more fuel than one that's properly tuned. * Afaststartcan drop yourgasoline mile- age to six miles to the gallon. Smooth, steady driving, on the other hand, can in- crease mileage. * When you start out, give your engine time to warm up. A cold engine uses con- siderably more fuel in driving than a warm engine. * Don't floorboard it when you start from a fuIF stop. Under full throttle, gasoline literally pours into the carburetOr; a lot of it continues through the engine and out the tail pipe. Some of it gets into the crank- case and dilutes the oil. * Keep tire pressures up. Underinflated tires seriously reduce gasoline mileage. All this may seem funny advice from a company that sells gasoline. But while the energy gap persists (and it is likely to, for some time), conservation is going to be exceedingly important to us. To you, too. So save as much gasoline as you can. That's what we're driving at. M©bW PAGENO="0140" 174 You've heard ~~s©~ne i~ Here cre 8 wcys to ~et có~ig~ There's a lot we all can do to make our gasoline supplies go farther this spring and summer. If each of America's 85 million cars consumes a little less fuel, we may get through the heavy driving season with only occasional local gasoline shortages. But that's a big if. To minimize the gasoline shortage. we need to take action now. Here are eight important ways to help: 1. Slowdown to 50 If we limit our maximum speed to 50 mph, the overall gasoline savings can be enormous. The slower you drive, the less fuel you use. At 50, about 11 per- cent less fuel is used than at 60. Many highway drivers can save as much as one gallon in seven by cutting back to 50. In both mileage and money, "fifty is thrifty" 2. Encourage car pools Car pooling can be pushed hard by state and local governments, together with business and labor. A third of all auto- motive travel is to and from work, but most of it involves just one person per car. Reduced tolls on bridges and high- ways, special parking arrangements, and other incentives can stimulate multiple occupancy of cars used for commuting. Possible savings run to many millions of gallons a day. 3. Improve driving habits Avoid jackrabbit starts. Drive at steady, moderate speeds without sudden accel- eration or braking. Don't let your engine idle more than a minute or so. These and othergasoline-conserving practices should be heavily promoted by public and private organizations. The accumu- lation of little savings can add up to im- pressive volumes of gasoline conserved. 4. Go easy on the air conditioning Don't forget you're paying for that cool air with gasoline-up to 15 percent more in cars equipped with air conditioners. Avoid use of air conditioning on days when the heat is only marginally uncom- fortable. Save fuel by moderating the temperature from the "coldest" setting. 5. Improve car maintenance Get an engine tuneup for better mile- age. Keep tires inflated to proper pres- sure and wheels aligned. Radial tires save gasoline. Again, the little savings add up to a lot. 6. Plan the use of your car Cut down on unnecessary trips by com- bining several errands in one. Get the groceries on the way home from school. Make shopping lists to avoid extra trips. Eliminate short rides by bicycling or walking; the garaged car gets unbeat- able mileage. 7. Consider other ways to travel Before starting a trip, look into alter- nate means of transportation. Can you take the train, bus. subway, or plane and leave the driving-and fuel problems- to someone else? 8. Stagger work hours in cities If urban workers didn't all travel at the same time, traffic would flow faster and smoother, thus reducing fuel consump- tion. Municipal authorities can work with business and labor to accomplish a good deal in this direction. By and large, these are painless ways to reduce gasoline consumption. As dividends, they offer the possibility of attractive money savings, lessened air pollution, and even some preservation of life and limb. As we enter the vacation driving sea- son, it seems likely that even though gasoline supplies are short, there are thngs we can do to get along. iV~©1bff This ad appeared in the New York Times On Aeri~~26, 1973. PAGENO="0141" 175 Stcr~1n~ to~*cy, we wc~ to show you how to cat c]cn~ cn ~àss ç~so~na Gaaotinesupplieawillbeverytightin pollution-controtdeviceathatdraatically the nationwide gaaoline aavinga could aome parta of the country thia apring reduce mileage. Theae devicea alone be enormoua. Maybe the states should and aummer. account for half of the increaae in gaao- conaidernew 50-mile-an-hourlimita. Not becauae U.S. refineriea are pro- line conaumption. Meantime, you can aet your own ducing less. They're turning it out at If each of America'a 85 million cam limit Make itSO. recordlevela,aaamatterof fact. conaumea a bit Ieaa fuel, though, we Mobilengineerafigurethatat50,you Gasoline will be ahort becauae aky- may get through the heavy driving uae about 11 percent leas fuel than at rocketing demand haa begun outdia- aeaaon without real hardahip. 60. On the highway, many dnvem could tancing refinery capacity and crude oil So Mobil wanta to ahow you how to aave about one gallon in aeven by aupplies. get along on tesa. slowing to 50. There are three main reaaona gaao- Selling leaa gasoline may aeem an That'aforatartera. line demand ia riaing ao faat (one-and-a- extraordinary role for an oil company. Over the coming weeka we'll have half timea aa faat aa it did in the 1 gSoa): But we feel ta the only wayto go in thia more tipa for aaving. Pay attentionand *More cara on the road. New-car aituation. you'll uae fewer gallons, cut coata, aaleaareatrecordhigha. Here'a our Brat fuel-aaving tip: stow reduce air pollution, and become a *More and more cars use a great van- down. Go alower than you're used to safer driver. ety of convenience devicea that guzzle going, eapecially on the highwaya. But one thing at a time. gasoline. Air conditioners, for inatance, Slow down, to 50 and you really cut Right now just alow down, America and otherpowertake-off devicea. your fuel consumption. If everyone tim- Slow down and save gaaoline. *The neweat cars are equipped with ited hia top speed to 50 mitea an hour, Remember. 50 ia thrifty. ____ Mobilt 42-3t7 0 - ia - at PAGENO="0142" 176 O~cr~ ~v~~bcd~ ~r~© ~`h~ ~ The car pool. A sensible way to save line demand is rising so fast (one-and-a- There are still others, and we'll get to gasoline, since more people in fewer half times as fast as it did in the 1960s): them in the coming weeks. carsuselessfuel. *Morecarsonlheroad.New-carsales Meantime, consider the car pool, You can organize car pools for practi- are at record highs. won't you? Talk it up at the office, the cally any kind of trip. To-the-plant pools, *Moreand morecars use convenience plant, the PTA. Maybe you can think of to-the-station pools, to-the-shopping- devicesthat really gulp the gasoline. An local possibilities for a system like the center pools, to-school pools. To-the- airconditionerislhe bestexample. one in Oakland, California. pool pools, when summer comes. *The newest cars are equipped with The Oakland Bay Bridga Authority If you like the pool idea, we'll sell less pollution-control devices that reduce there makes a big reduction in the toll gasoline. Thats all rightwith us. mileage. These devices alone account fora car carrying three or more people. Although refineries across the coun- for half of the increase in gasoline Since this started, car pools crossing try are turning out more gasoline than consumption. the bridge have almost doubled in num- ever, they're not able to keep up with . If each of America's 85 million cars ber. Gasoline savings-and the effects demand. Gasoline supplies may be very consumes a bit less fuel, though, we on traffic, air quality, and highway safety short in parts of the nation this spring maygelthroughthemonthaaheadwith- -areimportant. and summer. So we want to help you get out real hardship. The car pool is just Come on. Let's pool our resources. rnorefromeachgallon. one idea. Making 50 miles an hour Thatway,wecangetalongeven if gaso- There are three main reasons gaso- yourspeed limiton highwaysisanother. lineisshort. This ad appeared in the New York Tines on ~y 10, 1973 PAGENO="0143" 177 Dumb bunny Jackrabbit starts have always been bad driving, but now that gaaoline ia in short aupply they're really duwb. To aave gasoline, drive at a ateady rstewithoutaudden jerka or acreeching halta. And alow down on the highwaya. You .uae much less gasoline at 50 than you qoatco. ltyou'rejustsitling,wsiting don't let your engine idle more than a minute or Iwo. Why are we telling you all this? Because gasoline supplies may be very light in some parts of the country this spring and summer. We want to show you how to get along on less fuel. That may seem funny to you, coming from an oil company; but we simply think its the right thing to do in the circumstsnces. Gasoline is short even though refiner- ies across the country are turning it out at record levels. Thing is, demand has begun outdistancing refinery capacity snd crude oil supplies. There are three big ressons for the unprecedented demand: `More cars on the road. New-car sales are stall-time highs. `More and more cars have conveni- ence devices that guzzle gasoline. Any power take-off device is s drain on your gas supply, although the sir conditioner has the biggest appetite. `The newest cars are equipped with pollution-control equipment that reduces milesge. This equipment alone accounts for much of the ipcresse in gasoline consumption. So gasoline is in short supply. If every motorist uses a bit less fuel, though, we should gel through the coming months without real hardship. Good driving habits wilt be a big help. That's where you come in.. Mesntime, we'll be refining gasoline at top capacity; adding to our refining capabilities where wO can; esploring for new petroleum reserves; increasing our crude oil imports. Well do our part. You do youm. won't you? Shake those rabbit habits. Dumb bunnies waste gasoline. This ,d appeared ins the New York Tinnea on May 17, 1973 PAGENO="0144" 178 5h3 p~n~ t~1© £©Vt3 © ~ © Planaherdriving,thatis.Andtheway through thu months ahead with fewer *Morecarsontheroad. Ne'~csrsales she's going, there's s good chsnce she snot shortages. And the country prob- sre atrecord highs, will use less gssoline on her weekly sbly could get along without gasoline *More end more cars have convs- roundathan she used to. imports, which would improve our nience devices that use gasoline. You see whet she's doing, don't you? bslance-of-payments situation to the *The newest cars are equipped with Puffing several little trips together to tuneof$BOomillionayear. pollution-control devices thst reduce make e big one. Right now she's on the In the ordinary way of things, as vie mileage. Theueaccount for much of the way from the supermarket to the rug hope you know, we viork herd at selling increase in gasoline consumption, at cleaner.She'lldropthekidsoffatschool gssoline. But right now we think con- bythemuelvea. aftershulesvusthecleanera.Thenshe servation is the thing to sell, \W hope Wererufininggasolinesttopcapscity hess golf date, you buyit. We're sdding to our refining cspsbiliiies We dreamed this trip up, of course: Gssoline is short because refineries where we csn. We're exploring for new nobodynauda atrailerforgrocuriea. But just can't keep up with a demand thetis petroleum reserves. We're increasing you gutthe idea. rising one-and-s-half times as fast as it ourcrude oil imports. Believe us, it's an important idea If didduringthettixtiss. So,dowhatyoucsn,too,won't you? everydriverinthunationssvedagallon There are three big reasons for this Planyourdriving.Suetfyoucanssve of gasoline a week, we could get extrsordinarydsmand: - agallonaweek. This ad appeared in the New Yes-k Tiwea us Nay xii, 1973 PAGENO="0145" 179 ~©©E~ 01973 Mobil Oil Corporation We Americans get excited over lots of things. The price of food. Watergate. Energy shortages. The environment. The NFL game of the week. But not over the fact that cars kill over 100 people-and seriously injure 5,800 more-every single day. The Viet Nam war was an excrucia- ting experience that nearly tore our soci- ety apart. Yet auto accidents kill more of our young people each year than the Viet Nam war did in nine years. In fact, more people have losttheir lives in car accidents than in all the wars in U.S. history. Drop that into a cocktail conversation sometime and you'll get a polite yawn. 56,600 victims died in motor vehicle accidents last year. Half of them in acci- dents that involved alcohol-and hence were partly preventable. 2,100,000 in- jured. Cost: $19.4 billion. Fortunately, there is a bright side to the picture. Although the number of vehi- cle deaths rises all the, time-because more people drive more cars more miles- the motor vehicle death rate has consist- ently gone down. It dropped from 18 fatalities per 100 million vehicle miles driven in 1925, to 4.5 in 1972. This improvement is due to a combi- nation of things: Better highways (the death rate on Interstates is only 2.5). Safer cars. Better laws, better enforced. Better-trained administrators and safety educators. Especially, better-trained drivers who wantto drive more safely. Mobil's concern about traffic safety goes back at least 50 years, when we ran our first ad campaign giving safe-driving tips.. In 1966 we began an award-winning series of public service ads with these words: "We feel there is a moral responsi- bility that goes along with selling gasoline ...We want you to live' We also support with money and man- power the private organizations that work effectively in the traffic safety field: The Automotive Safety Foundation (now a part of the Highway Users Federation) and the National Safety Council. Mobil executives serve on the Boards of Direc- tors of both. Traffic safety efforts can only do so much. They may improve the national motor vehicle death rate-but statistical improvement is small comfort to the families of last year's 56,600 traffic victims. Let's wipe out the blind spot Americans seem to have about this na- tional scourge. We still want you to live. PAGENO="0146" 180 `~v~rs m~k~ ~ k~t Gasoline supplies may be hght in some 5. Plon your driving. Cut out unnecessary .kfore cars on the road. New-car sales are parts of the country this spring and summer, trips by combining several errands. Get the atall-timehighs. butwecanshowyouhowtogofartherosless groceries on the way home from school. tor * d co fu~Nce thg y lIsa em y too d ta ce~1 k~esh ~ r~ ~o'~ bc~rd vtces'hatco s megasol e 1. Getout of bad driving habits. Jackrabbit Could you learn towolkagain? *The newest cars are equipped with starts, for instance. Drive atsteady. moderate 6. Considerotherwaystogo.Canyoutakea polltrtiorr-controldevicesthatreduce mileage. speeds(you use much less gas at5O than you train, bus, plane, orsubway insread of an auto- Thesedevices alone accountfor perhaps half do at 60) without sudden acceleration or mobile? Fuller use of public transportation theincreaseingasolineconsump~on. braking. Don't tetyour engine idle more than would cutgasotineconsumpbon. So we're trying to sell you conservation aminuteortwoifyoucan help if. While you're doing what-jou can,we'tt right now, instead of gasoline. We thiok its ZGet into the pool idea. Share a car and be turning out gasoline at record levels; ex- the thing to do while shortages persist. We you conserve gasoline. Organize shopping ploring for new reserves; adding to ocr relin- know, for instance, that if every driver in the pools, work pools, beach pools, school pools. ing capabilities; increasing oar crude oil UnitedStates used justa gallon less gasoline 3.Keep cool without air conditioning when- imports. a week, the nation probably could get along everyou can. You're paying forthatartificially Fact is, refineries across the country have without gasoline imports. This would save coolairwith gasoline, been producing gasoline at record rates, But aboutS800million yearlyin foreign exchange 4,Keep your car in good shape. Get the skyrocketing demand has begun outdis- payments. engine tuned regularly. Keep tires at proper fencing refinery capacity cad crude oit ft we pull together, everyone ought to get pressure,and seethatwheelsarealigned. supplies, forthree main reasoes: alorrgwithoutreal hardship. M©b~f This ad appeared in ~he Ne's Yoak Times on Stay 31, 1973 PAGENO="0147" 181 ~©~Y ~1*i~~~$ By driving on radial tires you can do three good turns for yourself and for everyone else. Radials, properly inflated, provide a more stable ride-that much is widely known. But you may be surprised to learn that they also conserve gasoline and reduce automotive air pollution. The reason is that radials roll easier than conventional tires. Radials do all this while providing you with a new measure of driving ease and comfort. The reason is in their construction. The radial sidewall provides a more flexible tire than its predecessors, subtly changing shape to hold the road under all kinds of driving conditions. Take cornering, a critical maneuver. When cornering, or making a turn at speed, conventional tires tend to ride on one side of the tread. But ra- dials lean into a turn, keeping the tread flat on the pavement. Results: better stability, firmer grip, more con- trol than conventional tires. Radials also improve control on the straightaways. The treads stay full and flat, to give you good traction and handling. So you get less side- slipping than with conventional tires in crosswinds or on winding roads, and reduced sway and skid under normal driving conditions. Traction on wet roads is better, too. Because the radial tread has extra traction built into the design and be- cause it remains flat and open; water is dissipated more quickly and the rubber stays in firm, sure contact with the road. One rule about radials: use them on all four wheels or not at all. Be- cause radials hold the road so much better than conventional tires, mix- ing tires of different construction could affect your steering. (Radial users installing snow tires should make sure they're radials, too.) Radials have still other features you'll appreciate. A good radial can deliver up to twice the mileage of a conventional tire, and because it ab- sorbs impact better a radial resists damage from bumps and potholes. So all things considered-control, comfort, lower gasoline consump- tion, reduced exhaust emissions- radials are an excellent buy. Consider them when your conven- tional tires need replacing. This ad appeared in the New York Times on September 6, 1973. PAGENO="0148" 182 `~9w~y~ E~© ~©V~ rn©r~y~r~d ~ ~©U~ ~ ©V~1~: t~k~ P~ ~ U ~1 Today, more than ever, we want you to save money on home heating. Money- saving ways with heat almost always save fuel, too; and because of the cur- rent energy crisis, it's vital that every- one save where he can. There's no place like home for a start. Look at these ways you can save money and energy while you keep warm. (Maybe you should post this ad in your utility room, as a reminder): 1. Close house doors promptly to keep heat inside. Try to keep the chil- dren from running in and out unnec- essarily. Some experts estimate that fuel bills are three percent higher for every child you have. 2. Don't be a thermostat fiddler. Switching room temperatures back and forth wastes fuel. 3. Open window shades, blinds, or draperies to let sunshine add warmth to the rooms. It's a free source of home heating. 4. Turn off heat in rooms being ven- tilated or which are not in use. 5. Close fireplace dampers when not in use. If dampers are missing and fireplace is not used, close chimney opening. 6. Lower thermostat at night. Setting itback 10 degrees for eight hours will save 10 percent or more on heating costs. 7. Lower thermostat to 55 degrees when you are going away for a day or longer. 8. Check radiator enclosures to be sure they are not trapping heat. If you paint them, use paint that will allow for the maximum heat escape. Some experts suggest enamel. 9. Remove rugs and furniture from places where they block radiators or registers. 10. Check steam radiator valves for proper function. Replace non-ad just- able steam radiator valves with ad- justable ones. Drain air or water, if present, from steam radiators to al- low them to heat up fully. 11. If your garage is heated, keep doors closed and temperature low. 12. Avoid overheating furnace. Over- heating wastes fuel. 13. Drain a pail of water from the bot- tom of a domestic hot water tank monthly. This removes the sediment and improves efficiency. 14. Check and repair leaky hot water faucets. A leak of only one drop a second can mean a loss of 700 gal- Ions of hot water a year. Also, slow leakage will erode valve seats. And it costs money to heat wasted water. 15. Insure clean, better-burning fuel by using oil filters. Be sure to clean them annually. 16. Arrange for your heating fuel dealer to send an expert to clean, ad- just, repair, and run an efficiency test on your heating plant at least once a year. You can prevent breakdowns, and pinpoint problems before they get too serious. 17. You should have at least six inches of thermal insulation over yourtopfloorceiling. This should pay for itself in about a year if you live in the New York-Connecticut area or north of it. 18. If you have gas heating, shut off the pilot light when the heating sea- son ends. (Ask your gas company how.) The pilot light consumes about 1,440 cubic feet of gas a month. 19. Use weather stripping to seal up air leaks around windows and doors. Storm windows will cut in half the heat that is needlessly lost through the windows in your house. Nothing difficult about any of those money-saving, energy-saving ideas, is there? Please accept them with our warm wishes. PI~©bW S 1973 Mobil Oil ~ PAGENO="0149" 183 * TD~~ fl~. ~~Tfl/~3 c':t.fll t© ~ 2U~3 k~t IL Everyone at one time or another has thought,"Gee, I wish I'd said that' Which is exactly how we feel about a 10- page article in the October issue of Popular Science entitled,'Beating the Energy Crisis: More Heat from Less Fuel:' ~ We wish we'd written the article because it n help almost anyone come to grips with e energy crisis one small bit at a time.The article covers heating-system adjustments, weatherproofing, and other fuel-saving tips. There's something for everyone, ranging from the person who's competent to tackle a home heating system to the one who cringes at the sight of a screwdriver. These days, nobody can afford to over- look good suggestions on how to conserve fuel. So if you care to drop us a card (at Dept. PSM, 150 East 42nd Street, New York, N.Y. 10017), we'd be pleased to send you a free reprint of Popular Science's words of wisdom. it's the next best thing to uttering them ourselves. PAGENO="0150" 184 L~L~ UU L~,. ~i'.~7 ~u~? ~ ~~]`~t You know, you may be too bright for your own good. In the present energy crisis, every- body needs to look forways to conserve energy. The sensible use of electric light can help. About one-fourth of all the electric energy sold goes for lighting. In a high- rise office building, over half of the electrical energy consumed goes into illumination. So whether you're at home or on the job, it's not very smart to be too bright. Around the house, you can start sav- ing energy by doing what your mother always told you to do: turn off a light if you're not using it. Try getting along without electric lights during the day, in those rooms with windows that let plenty of daylight in. See how nice nat- ural lighting can be. Save a watt wher- ever in your home you see the opportu- nity. Common sense will tell you what's wasteful and what isn't. The situation in buildings is different. And, from an opportunity-to-conserve standpoint, more exciting. The New York Chapter of the Ameri- can Institute of Architects takes an urgent interest in energy conservation, and AlA observers see a great many chances to make important savings in the energy used to light city buildings. First of all, AlA points out that the overall level of illumination in many kinds of buildings has been raised year after year so that now it often is exces- sive-at least, in terms of energy- responsibility. In these cases, we could be saving lots of watts. Some examples: New York City schools used 20 footcandles of light for classrooms in 1952. That was raised to 30 footcandles in 1965, and to 60 in 1971 -up 200 percent in 19 years. Lighting recommendations for libra- ries rose from 20 footcandles 20 years ago to 70 footcandles last year-an increase of 250 percent. The suggested light level for office work that requires "reading ink" has been raised from 30 footcandles to 70, over the last 20 years. The AlA thinks all this brightness may be dumb. It points to studies made afew years ago at California's San Jose Col- lege, v/here it was found that a light level between three and 10 footcandles is adequate for efficient reading. Higher light levels do not increase efficiency, and may even increase fatigue. Earlier research at the University of Minnesota concluded that 10 to 15 footcandles should provide satisfactory conditions when one's eyes are normal and the printing is legible. Opportunities for important energy savings through reduced or better- planned illumination can be found all through a building. (Do whole floors have to be lighted at night when offices are being cleaned?) And the kicker is that when you cut down your energy consumption, you cut your bills. Con- servation can be profitable, and that should send business managements running for the light switches. There are plenty of other ways to con- serve energy around the house and at work. Lighting just happens to be one obvious target. We'll go after others in future appearances here. This ad appeared in the New York Times on May 2L1., 1973. PAGENO="0151" 185 GROUP III ~7~1~